rural finance sector restructuring and development - vol 2

Technical Assistance Consultant’s Report

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. All the views expressed herein may not be incorporated into the proposed project’s design.

Volume 2: Regional Rural Banks Project Number: 36343 December 2003

INDIA: Rural Finance Sector Restructuring and Development (Financed by the Government of the United Kingdom)

FINAL REPORT

Prepared by

PriceWaterHouse Coopers PVT. Limited (Finance & Governance), India in association with Bhartiya Samurdhi Investment and Consulting Services Limited (BASIX), India

For Ministry of Finance, Department of Economic Affairs (Banking Division) TA Management Committee formed by the Ministry of Finance, Department of Economic Affairs (Banking Division)

Technical Assistance (TA) No. 4247-IND Rural Finance Sector Restructuring and Development

Final Report Volume 2: Andhra Pradesh RRB Project

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TABLE OF CONTENTS

1 INTRODUCTION 3

1.1 COUNTRY CONTEXT 3 1.2 REGIONAL RURAL BANKS 3 1.3 PAST EFFORTS TO IMPROVE VIABILITY OF RRBS 5 1.4 THIS PROJECT 7

2 RRBS: OVERVIEW OF PERFORMANCE AND KEY ISSUES 8 2.1 OVERVIEW OF PERFORMANCE 8 2.2 KEY ISSUES 8

3 ANDHRA PRADESH 11 3.1 THE STATE 11 3.2 THE ANDHRA PRADESH RRBS 12

4 POVERTY, SOCIAL, AND GENDER ANALYSIS 15 4.1 INDIA 15 4.2 ANDHRA PRADESH 15

5 ENVIRONMENTAL ANALYSIS 17 5.1 OVERVIEW 17 5.2 ENVIRONMENTAL IMPACT OF PROSPECTIVE SUBPROJECTS 17

6 THE PROJECT 19 6.1 STRATEGY 19 6.2 STRUCTURE 19 6.3 LAWS AND REGULATIONS 22 6.4 GOVERNANCE 23 6.5 OPERATIONS 23 6.6 HUMAN RESOURCES 24 6.7 MANAGEMENT INFORMATION SYSTEM AND TECHNOLOGY 27 6.8 CONTROL AND SUPERVISION 28 6.9 FINANCIAL RESTRUCTURING 29 6.10 MANAGING RISKS 30

7 PROGRAMME FRAMEWORK 31 7.1 BUDGET OVERVIEW 33 7.2 IMPLEMENTATION SCHEDULE 33

8 IMPLEMENTATION ARRANGEMENTS 34 9 ROLES AND RESPONSIBILITIES 35 10 POLICY MATRIX 38 11 RISK ANALYSIS AND MITIGATION 41 ANNEXES: 1. SOCIAL, POVERTY AND GENDER ANALYSIS 2. INITIAL ENVIRONMENTAL ANALYSIS 3. INDICATIVE HARDWARE AND SOFTWARE CONFIGURATION 4. FINANCIAL RESTRUCTURING AND MODEL RESTRUCTURING PLAN 5. PROGRAMME FRAMEWORK 6. DETAILED BUDGET 7. IMPLEMENTATION PLAN



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Glossary AP Andhra Pradesh BPL Below Poverty Line BRA Banking Regulation Act CCS Credit Cooperative Structure CD Credit Deposit CRM Customer Relationship Management Crore Ten million DAP Development Action Plan DCCB District Central Cooperative Bank FY Financial Year GDP Gross Domestic Product GoAP Government of Andhra Pradesh GoI Government of India HDI Human Development Index HO Head Office HR Human Resources ID Investment Deposit IDBI Industrial Development Bank of India IFCI IFCI Ltd., formerly Industrial Finance Corporation of India INR Indian Rupees IT Information Technology JLG Joint Liability Group LAB Local Area Bank Lac/ Lakh Hundred Thousand MFI Microfinance Institution MoU Memorandum of Understanding NABARD National Bank for Agriculture and Rural Development NAIS National Agriculture Insurance Scheme NPA Non Performing Asset PIU Programme Implementation Unit RBI Reserve Bank of India RFI Rural Finance Institution RO Regional Office RRB Regional Rural Bank SBH State Bank of Hyderabad SBI State Bank of India SC Scheduled Caste SHG Self Help Group ST Scheduled Tribe TA Technical Assistance TOR Terms of Reference UTI Unit Trust of India



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1 INTRODUCTION

1.1 Country Context 1-1 Rural India contributes approximately 40% of India’s GDP and has a population of nearly 700 million. Three quarters of this population is dependent on agriculture for its livelihood. India has one of the world’s most extensive formal rural credit systems, with nearly 46,000 bank branches and more than twice as many cooperative credit outlets in rural areas. Physical outreach is not an issue, except in some remote areas, however access to rural financial services is. 1-2 Commercial Bank credit to rural areas is 10% of total bank credit as against rural contribution to GDP of 40%. The Regional Rural Banks (RRBs) account for just 8% of the total formal sector credit, with nearly 60% thereof being lent to the “non-target group”. Similarly, the Cooperative Credit Structure (CCS) is known to serve the interests of middle and larger farmers. Studies indicate that less than half of the credit usage by rural households comes from formal sources. Rural financial institutions (RFIs) typically function in a backdrop of poor credit discipline in rural areas and frequent extensions of populist measures such as interest and loan waivers, which have led to their being unprofitable and a substantially eroded capital base for these RFIs. RRBs were recapitalised with an infusion of over Rs. 21 billion, while the Government of India (GoI) has recently announced its intention to recapitalise the CCS also. 1-3 The landless, who constitute the bulk of the rural poor, do not get much credit from any formal financial institution. The recent bank loans through self-help groups (SHGs) are the sole exception, where the landless and other poor are being reached significantly. A variety of microfinance institutions (MFIs) working with the poor, while being effective, lack scale due to their limited ability to raise resources and function without facilitative regulations. None of the existing institutions, however, have been able to provide savings services to the poor. The near absence of risk mitigation instruments and mechanisms such as insurance for life, health, crops and assets and commodity derivative contracts to deal with price risks, only exacerbates the vulnerability of the poor. 1-4 The RFIs and apex institutions were conceived in an era when the challenges were quite different – the predominant one being to ensure food self-sufficiency in India. Thus, these institutions, need to revisit their raison d’etre, and devise a strategy, which would make them dynamic and responsive players to the emerging challenges and opportunities of rural financing in India in the post-reform era.

1.2 Regional Rural Banks 1-5 Regional Rural Banks were set up consequent to the Banking Commission observation in 1972 that despite massive expansion of network of commercial banks (consequent to nationalisation of commercial banks), there was still a need for having specialised network of bank branches to cater to the needs of the rural poor. The RRB Act was passed in 1976 and RRBs were set up so as to hybridise



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commercial banking culture with rural ethos. The thinking was to set up RRBs as state-sponsored, region-based, rural-oriented commercial banks having the low cost profile of cooperatives with professional discipline and modern outlook of commercial banks. Between 1975 and 1987, 196 RRBs were established. A large number of branches of RRBs were opened in the hitherto unbanked or underbanked areas providing services to the interior and far- flung areas of the country. RRBs were expected to cover primarily the small and marginal farmers, landless labourers, rural artisans, small traders and other weaker sections of the rural community. 1-6 RRBs have played a significant role in providing banking services in remote rural areas. At the same time, during the very first 10 years of the setting up of RRBs, 152 out of 188 RRBs had accumulated losses of Rs 3.4 billion. The losses went up sharply in 1992 on account of implementation of the National Industrial Tribunal award bringing parity in wage structure of RRBs with that of commercial banks. 1-7 Since then several committees were set up to look into the problems and issues faced by RRBs and suggest ways and means to address the same. Over the period during 1994-2000, 187 RRBs were provided with a total of Rs 22 billion for recapitalisation. However, their financial viability continues to be shaky by policy rigidities coupled with a low capital base in an environmental of inadequate infrastructure and deep social and economic disparities. 1-8 The 196 RRBs, with 14,433 branches spread over 516 districts, vary widely in coverage and size:

• 45 RRBs cover just one district each while another 109 cover 2-3 districts each; 29 RRBs service 4-5 districts while 13 RRBs have a service range of 6-9 districts each;

• 70 RRBs have upto 50 branches each; 109 RRBs have between 51 – 150 branches each while 17 RRBs have over 150 branches each;

• 82 RRBs have assets upto Rs. 2 billion, another 82 RRBs have assets between Rs. 2 billion – Rs. 5 billion while 32 RRBs have assets over Rs. 5 billion.

1-9 Further, although RRBs branch presence is remarkable in the rural areas, in terms of providing services in very remote and inaccessible locations, their performance in the provision of financial services is not commensurate. At present, RRBs’ share in agriculture credit is 8% while that of commercial banks is about 50% and that of CCS is 42%. Such low market share coupled with poor financial performance raises serious issues about the RRB model. Studies have also pointed out that in an effort to meet financial performance expectations of shareholders, RRBs appear to be drifting from their mission to serve the underserved and unreached in a cost effective way.



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1.3 Past Efforts to improve viability of RRBs 1-10 Past efforts to improve financial viability of RRBs have ranged from recapitalization (as discussed earlier), to a series of initiatives1 including, among others:

• Deregulation of interest rates • Permission to lend outside target groups • Introduction of prudential norms for income recognition and asset

classification • Provision for rationalization of branches • Preparation of development action plan (DAP) and signing of MoU with

sponsor banks for sustained viability in a planned manner • Provision for greater role and larger operational responsibilities to Sponsor

Banks in the management of RRBs 1-11 The various committees set up to review the working of RRBs and their key recommendations include:

• Dantwala committee (1977): Recommended increasing number of RRBs and control to be vested with NABARD;

• Agricultural Credit Review Committee (1989): Observed that RRBs no longer enjoyed a low-cost advantage since their pay scales were at par with commercial banks and recommended merger with concerned Sponsor Banks by making necessary regulatory amendments;

• Narsasimham Committee on Financial System (1991): Recommended setting up of rural banking subsidiaries by public sector banks and transfer of respective rural branches to these subsidiaries. RRBs and their Sponsor Banks to decide on RRBs retaining their separate identity or merger of RRBs with rural subsidiaries.

• Bhandari Committee on Restructuring of RRBs (1994): Identified 49 RRBs for comprehensive restructuring (including preparation of DAP) and made recommendations regarding delineation of roles and responsibilities of supervising agencies, HR issues, augmentation of share capital, States’ role in recovery of dues, deregulation of interest rates and rationalization of branch licensing policy.

• Basu Committee on Revamping of RRBs (1996): Identified 68 RRBs for restructuring and recommended introduction of prudential norms for RRBs and liquidation of RRBs, which might not be able to respond positively to revamping strategy.

• Thingalaya Committee (1997): Recommended categorisation of RRBs based upon their viability status and size, special package for RRBs in North-Eastern sector and delineation of roles of RBI, NABARD and Sponsor Banks.

• Agrawal Committee on Manpower Norms (2000): Recommended that norms for staffing in RRBs be pegged at 4.20 per unit with relaxation for RRBs in North-Eastern Region and hilly/desert areas.

1 Based on select recommendations of various committees



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• Expert Committee on Rural Credit (2001): Recommended recognition of RRBs which do not carry forward any accumulated losses as Local Area Banks (LABs) and conversion into banking companies to facilitate larger capital flow from new investors.

1-12 It would be pertinent to mention that while financial support extended by the Central Government to UTI, IDBI, IFCI and few nationalized banks exceeded Rs. 250 billion2 since 1991, fresh capital infusion in rural financial institutions has not exceeded Rs. 30 billion since 1991. 1-13 Two recent reviews with rather different structural recommendations, the Chalapathy Rao Committee (2002) and the Sponsor Banks’ report to Government of India (2004) are summarized below in a little more detail. 1-14 Key recommendations of the Chalapathy Rao Committee include: • Differentiated ownership structure based on the specified financial health

categories • Structural consolidation of RRBs: Amalgamation of RRBs falling within the same

socio-economic zone to create one or few RRBs in each state. • Business Development and Management Issues in RRBs to be addressed • Governance Structure of RRBs

o Number of Board members not to be fixed uniformly for all RRBs and to range from 5-11;

o Board representation to be in proportion to the shareholding; o As part of the consolidation process some Sponsor Banks may be eased

out and other financial institutions or other strategic partners may take over as Sponsor Institution.

• Regulatory and Supervision issues o RRBs to obtain license from RBI on the lines of similar provisions of

Banking Regulation Act (BRA), 1949 within a specified timeframe; o Phased introduction of capital adequacy norms; o Recapitalization amount outstanding under “Share Capital Deposit

Account” may be utilized to wipe out accumulated losses. • Operating Structure and Human Resource Development

o While organization structure may be decided by the Board, a proposed structure may include

Head Office focusing on corporate policy issues District Offices/Branches and rural branches managing and

developing field work. o Flexibility to open and close branches; o Respective RRB boards to decide on operational, remuneration and

promotion policies and training strategy in consultation with Sponsor Institution.

• Proposed amendments in the Regional Rural Banks Act, 1976 include those relating to licensing of RRBs, change in capital structure and shareholding

2 Source: SBI monthly review October 2004



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pattern, devolution of select powers of the Central Government to the RBI and RRB boards, and setting up of a Supervisory Authority, among others.

• Technology Induction plan to be drawn up by RRBs considering their financial resources, constraints/requirements of rural areas and compatibility with systems of Sponsor Banks.

1-15 Key recommendations of Sponsor Banks Report to Government of India (“Sponsor Banks Report”): • Amalgamation of 196 RRBs to create 6 Zonal Banks; • Regional Bank to function as Commercial Banks/Local Area Banks providing all

banking facilities; • Share capital participation of Sponsor Banks to continue but one major bank to

take over management role; • Share capital contribution of State Governments and Central Government to

continue as is; • NABARD to continue as Supervisory and Regulatory Authority. 1-16 Since then, the Finance Minister and his ministry have said that sponsor banks must take responsibility for RRBs but no definite scheme has been proposed.

1.4 This Project 1-17 As may be seen from the above there has been no dearth of good ideas to improve the working of RRBs. This project focuses on details of implementation for realigning RRBs in the state of Andhra Pradesh to their mission in a sustainable way and draws substantially from the various studies , task forces and reports commissioned by GOI to revitalize, reform and restructure RRBs.



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2 RRBS: OVERVIEW OF PERFORMANCE AND KEY ISSUES

2.1 Overview of Performance The table below presents key performance parameters for RRBs (196 in numbers)

Rs. Billion Year Ended March 31 1999 2000 2001 2002 2003No. of Branches 14,499 14,301 14,313 14,390 14,433 Staff 71,095 70,294 70,141 69,876 69,547 Deposits 271 322 383 445 501Annual Growth in Deposits 19% 19% 16% 12%Borrowings 36 38 41 45 48Owned Funds 22 30 35 41 47Outstanding Advances 114 132 158 186 222Annual Growth in Advances 16% 20% 18% 19%Investments 189 229 276 305 331Annual Growth in Investments 21% 20% 10% 8%Credit Deposit (CD) Ratio 42% 41% 41% 42% 44%Investments Deposit (ID) Ratio 70% 71% 72% 69% 66%Net Profit/ Loss 2 4 6 6 5Accumulated Loss 31 30 28 27 28No. of RRBs having Accumulated Losses 153 141 116 110 97No. of RRBs in Profit 147 162 170 167 156No. of RRBs in Loss 49 34 26 29 40NPA % 28% 23% 19% 16% 14%Recovery % ( as on 30 June of previous year) 60% 64% 68% 71% 72% Source : NABARD

2.2 Key Issues 2-1 Key issues are discussed below: Misalignment of Ownership and Management 2-2 The most pressing issue for RRBs is the misalignment of management of ownership and management. While the largest owner, the Central Government (50%) is too distant to manage, the nearest, the State Government (15%), has too little a shareholding. The Sponsor Bank with 35% shareholding plays the key management role but does not own a majority of the shares. Though shareholding by the governments (central and state) to the extent of 65% has added to the confidence of the depositors, it is proving to be difficult in the restructuring exercise in terms of stakeholders agreement to an effective restructuring. Risk Aversion and Mission Drift 2-3 In the decade and a half since banking sector liberalization and ensuing focus on financial performance, RRBs have drifted away from their mission. During the last 5 years gross loans and advances grew at an average growth rate of 19% with the CD ratio stagnant at around 41%-44% during this period. The CD ratio during



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FY2003 stood at 44% as against the RBI stipulation of 60%. This has serious implications for provision of credit to meet the needs of the rural borrowers. The ID ratio has been at around 66%-72% during these years indicating the relative preference of RRBs towards investment rather than the main business of lending. High Cost Operations 2-4 As on 31 March 2003, the liabilities of RRBs on a consolidated basis comprised owned funds3 (Rs 47 billion), deposits (Rs 501 billion) and borrowings (Rs 48 billion). Deposits grew at an average growth rate of 17% during the last 5 years. Though the RRBs are helping in mobilisation of savings in the rural areas, it is at a higher cost as a large proportion of deposits are term rather than demand deposits. Commercial bank branches in the rural areas offer competition for lower cost current accounts from traders etc., and government funds, as they can service such customers better. Inadequate Loan Loss Provisioning 2-5 RRBs have shown improvements in loan management over the last five years and NPAs have come down from a high of 27.8% during 1999 to 14.4% as on March 31, 2003. This has also been coupled with an increase in recovery rates to around 72% in FY2003. While standard assets have increased from 56% to 72%, substandard and doubtful assets have declined from 9% and 28% to 8% and 17% respectively. Loss assets came down to 3% from 6% from 1995 to 1999. Even though asset quality appears to be improving with a decline in NPA levels and increase in recovery, RRBs have relatively low provisioning levels (as compared to commercial banks4) with 162 RRBs having provisioning at less than 50% of Gross NPAs. Low Capital Adequacy 2-6 Despite recapitalisation, the Net Capital to Assets ratio (proxy for capital adequacy ratio) of RRBs is low with 98 RRBs at less than 4%. Thus, significant proportion of the deposit base can be considered at risk. Though risk is mitigated to some extent on account of the ownership structure (Government of India 50%, Sponsor Bank 35% and respective State government 15%) of RRBs, the low capital base of RRBs has also led to low performance across different financial indicators. Capital infusion required to achieve a minimum 12% net capital to asset ratio works out to over Rs. 55 billion based on the consolidated picture as on 31st March, 2003. If this level of capital adequacy were to be achieved for individual RRBs, the amount required would be larger. Inspite of the growth witnessed by RRBs, the share capital is pegged at Rs 10 million and additional capital infused has been kept as ‘share capital deposit’ pending amendment in the RRB Act 1976.

3 Share capital + share capital deposit + reserves 4 Provisioning levels are over 50% of NPA for most commercial banks



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Low Profitability, High Accumulated Losses 2-7 Inadequate capitalization of RRBs is further compounded by continuing losses. RRBs experience intense pressure on margins due to high costs and setting of lending rates without taking full costs into account. The number of RRBs in profit had gone up to 170 in FY2001 but declined again to 156 by FY2003. Of the 196 RRBs, 40 (increased from 29 in FY2002) recorded losses in FY2003 and 97 (decreased from a high of 153 in FY1999) had accumulated losses, aggregating Rs. 27.5 billion. Accumulated losses have resulted in 55 RRBs having negative networth and deposit erosion of greater than 10% in 52 RRBs. Overall profitability was adversely affected in FY2003 with net margins declining from 1.24% in FY2002 to 0.92% in FY2003. Net margins are likely to be under pressure with interest rates easing out and yield on investments declining. Completion with Sponsor Banks The RRBs do not have adequate integration with the financial markets of the country and for every financial/business initiative they are heavily dependent on Sponsor Banks which themselves have got a presence in the same rural areas and as such at the field level the RRBs are perceived as potential competitors. Need for Capacity Building RRBs have high cost resources with inadequate training, low productivity and insufficient systems and technology support. These issues will need to be addressed on priority if RRBs are to be revitalized.




3 ANDHRA PRADESH

3.1 The State 3-1 Andhra Pradesh (AP) state in India is situated in the southern peninsula. The state is organized into 1110 mandals (administrative divisions) in 23 districts. The total population is 75.7 million, of whom 55.2 million (73 %) live in 26,586 villages and the rest in cities/ towns.

Andhra Pradesh: A Snapshot5

Geographic Details Number of Districts 23 Number of Blocks 1110 Number of Villages 26,586 Total Land Area (million hectares) 27.44 Total Forest Area (% of Total Land Area)

22.59

Total Sown Area (million hectares) 9.73 (35.5% of Total Land Area) Total Irrigated Area (million hectares) 3.61 (13.2% of Total Land Area)

Demographic Details Population 75.7 million Rural Population 73% Population Density 275 persons per sq. km Literacy Percentage 61% Male literacy 76% Female literacy 51% Below Poverty Line (BPL) population6 16% (11.9 million) Rural population Below the Poverty Line

11%

Urban population Below the Poverty Line

26%

Trend of contribution of various sectors to State Income at Current Prices

(INR Billion) Item 1960-61 1970-71 1980-81 1990-91 1997-98State Income

9.83 25.23 73.24 298.67 787.05

Primary Sector

5.78 (58.7%)

14.42(57.14%)

34.14(46.61%)

108.77 (36.41%)

255.56(32.47%)

Secondary Sector

1.26 (12.81%)

3.39(13.43%)

12.17(16.61%)

65.70 (21.99%)

175.15(22.25%)

5 Source: Census 2001 6 The planning commission defines the poverty line as a per capita monthly expenditure of Rs. 49 for rural areas, and Rs. 57

in urban areas, at 1973-74 all India prices. These poverty lines correspond to a total household per capita expenditure sufficient to provide, in addition to basic non food items that is clothing and transport, a daily intake of 2400 calories per person for rural areas, and 2100 in urban areas. Individuals who do not meet these calorie norms fall below the poverty line.




Tertiary Sector

2.79 (28.38%)

7.42(29.41%)

26.93(36.76%)

124.10 (41.55%)

356.35(45.27%)

Source: Vision 2020 document 3-2 There has been a persistent decline of the contribution of the primary sector to the state economy with a concomitant increase from the tertiary sector. According to the Vision 2020 document, the state is planning a growth of 6 percent per annum in agriculture but at same time reduction in share of employment to 45 percent in the year 2020. This would be through absorption of the labour force in the other sectors of the economy. 3-3 The following tables provide a profile of banking in Andhra Pradesh and of sector wise credit flow during 2003-04. Financial sector:

Banking Profile as on 31.3.2003

Particulars Commercial

banks RRBs

State Cooperative

Bank DCCBs

Local Area Bank Total

No.of banks 48 16 1 22 2 89 No.of branches 4041 1168 24 575 11 5819 69.4% 20.1% 0.4% 9.9% 0.2% 100.0% Of which rural 1531 915 0 374 9 2829 54.1% 32.3% 0.0% 13.2% 0.3% 100.0% Source: Andhra Pradesh State Credit Plan 2004-2005-State Level Bankers' Committee,Andhra Bank

ANNUAL CREDT PLAN -SECTOR WISE FLOW DURING 2003-04 Sector

Agriculture Agri Allied Non-Farm SectorOther Priority

Sector Total % Sl.No.

Category of the Banks

1 Commercial

Banks 457048 52.9% 24578 64.2% 262171 77.5% 422026 76.3% 743797 60.0%

61.4% 3.3% 35.2% 56.7% 100.0%

2 Regional

Rural Banks 133147 15.4% 3737 9.8% 9819 2.9% 74897 13.5% 146703 11.8%

90.8% 2.5% 6.7% 51.1% 100.0%

3 Cooperative

Banks 271186 31.4% 9856 25.8% 4492 1.3% 43247 7.8% 285534 23.0%

95.0% 3.5% 1.6% 15.1% 100.0%

4 Others 2270 0.3% 102 0.3% 61998 18.3% 13167 2.4% 64370 5.2%

3.5% 0.2% 96.3% 20.5% 100.0%

Total 863651 100.0

% 38273 100.0

% 338480100.0

% 553337 100.0

% 1240404 100.0%

69.6% 3.1% 27.3% 44.6% 100.0%

Source: Andhra pradesh State Credit Plan 2004-2005-State Level Bankers' Committee,Andhra Bank

3.2 The Andhra Pradesh RRBs 3-4 There are 16 RRBs spread across 23 districts of AP, sponsored by 5 Commercial Banks namely SBI (5), SBH (4), Syndicate Bank (3), Indian Bank (2)and




Andhra Bank (2). Of the 1168 RRB Branches in AP, SBI has the highest number at 487 followed by Syndicate Bank with 330. The staff strength at state level is 5724. RRBs account for 32% of bank branches in rural AP as compared with commercial bank branches (54% of total) and DCCBs (13% of total). However, these branches account for only 15.4% of agricultural credit flow in the state (11.8% total credit). 3-5 In FY2004, Net Profits recorded by RRBs in AP aggregated Rs. 1149 million. Syndicate Bank sponsored RRBs recorded the highest profits at Rs.611 Million. SBI sponsored Kakatiya RRB is the only RRB with current losses and three RRBs namely, Kakatiya, Nagarjuna and Sri Visakha, all SBI sponsored have accumulated losses (Rs. 292 Million). 3-6 The total networth of all RRBs in AP was Rs. 5,138 million as on March 31, 2004 with Syndicate Bank sponsored RRBs (networth Rs. 2,367 million) accounting for around 46%. 3-7 The total deposits of RRBs in the state were Rs. 47,834 million as on March 31, 2004. SBI sponsored RRBs had a total deposit base of Rs. 16,805 million while Indian Bank sponsored RRBs had the lowest deposit base (Rs. 4400 million) as on March 31, 2004. 3-8 CD ratio at the state level stood at 71% as on March 31, 2004. Andhra Bank sponsored RRBs recorded a CD ratio of 82% while SBH sponsored RRBs recorded a CD ratio of 54%. 3-9 Total net Loans and Advances were Rs. 33,011 Million as on March 31, 2004 with SBI sponsored RRBs (Rs. 11,903) accounting for 36%.

3-10 NPAs at state level stood at Rs.2752 Million (9% of loans outstanding) as on March 31, 2004 with SBI sponsored RRBs accounting for 52% of total NPAs. 3-11 The exhibit below provides key performance parameters of RRBs state-wise for year ended March 31, 2003.




Year Ended March 31, 2003 Rs. Million Name of the RRB Districts Branches Owned Deposits Gross Acc. NPAs NPA Net

Funds Loans Losses Profit Loss % Margin%

HARYANA 18 293 1,801 12,832 6,762 171 469 - 490 7.2 3.1HIMACHAL PRADESH 7 133 350 6,495 1,963 - 41 - 128 6.5 0.6JAMMU & KASHMIR 13 268 744 8,623 1,611 997 99 (158) 208 12.9 -0.6PUNJAB 16 204 1,400 8,374 3,507 - 354 - 184 5.2 3.8RAJASTHAN 34 1,014 2,093 30,894 13,770 1,967 390 (73) 1,159 8.4 1.0ARUNACHAL PRADESH 6 19 31 414 327 223 - (112) 258 79.0 -20.7ASSAM 23 398 896 13,739 4,682 1,038 47 (33) 839 17.9 0.1MANIPUR 9 29 100 254 139 142 - (21) 49 35.0 -5.5MEGHALAYA 4 51 234 1,554 406 - 31 - 136 33.6 1.6MIZORAM 8 54 90 1,007 337 56 3 - 103 30.6 0.3NAGALAND 5 8 31 91 43 16 - (2) 6 14.4 -1.2TRIPURA 4 86 424 6,467 1,781 1,390 21 - 653 36.7 0.3BIHAR 38 1,486 3,014 45,844 11,439 5,264 480 (607) 2,321 20.3 -0.3JHARKHAND 21 391 822 12,877 3,371 1,217 39 (236) 972 28.8 -1.4ORISSA Total 30 835 1,840 24,999 14,080 4,598 131 (440) 2,231 15.8 -1.0WEST BENGAL 20 873 1,603 36,211 13,640 2,820 86 (85) 2,274 16.7 0.0CHHATTISGARH 17 438 930 12,376 3,313 1,501 55 (56) 577 17.4 0.0MADHYA PRADESH 44 1,056 2,428 33,461 13,234 2,566 170 (55) 1,877 14.2 0.3UTTARANCHAL 13 171 458 5,106 1,796 20 76 - 158 8.8 1.3UTTAR PRADESH 72 2,845 13,610 119,502 39,859 1,574 2,407 (52) 8,140 20.4 1.8GUJARAT 23 368 1,397 13,023 6,312 258 240 - 869 13.8 1.5MAHARASHTRA 20 588 1,163 14,440 6,852 1,303 42 (185) 1,540 22.5 -0.9ANDHRA PRADESH 23 1,158 4,563 41,927 29,535 402 906 (23) 2,725 9.2 1.7KARNATAKA 29 1,103 4,227 30,793 25,484 - 770 (10) 2,700 10.6 1.9KERALA 10 354 1,763 12,722 12,043 - 298 - 1,169 9.7 1.8TAMILNADU 9 210 649 6,958 5,292 - 183 - 231 4.4 2.1

ALL INDIA 516 14,433 46,660 500,983 221,578 27,522 7,340 (2,147) 31,997 14.4 0.9

Current

Source: NABARD 3-12 As seen from the above exhibit, RRBs in the Southern States performed relatively better than RRBs in other regions7 in terms of net profits and NPA levels in FY2003. In terms of owned funds, loans and deposit size, AP RRBs are the largest among southern states and the top three on an all-India basis. AP is the only southern state to have accumulated losses and achieved net margins of 1.7% in FY2003, lowest among southern states but higher than the all-India level. RRBs in AP have improved their performance (particularly, considering FY2004 indicators) post capitalization but have potential for further improvement in profitability and asset quality as achieved by RRBs in states including Tamil Nadu, Kerala, Haryana and Punjab. Further, it is critical that RRBs are reoriented to their mission of outreach while focusing on sustainable operations.

7 Besides Haryana and Punjab




4 POVERTY, SOCIAL, AND GENDER ANALYSIS

4.1 India 4-1 India is the second most populous country in the world with a population of over one billion. As of 2001, over 30% of its population was under 15 years of age. India’s HDI ranking in 2003 was at 127 in a list of 175 countries. Compared with an annual population growth rate of 2% in 1975-2001, the projected rate for the next fifteen years is 1.3%8. 4-2 Poverty levels in independent India increased from around 45% to 57% in the first three decades. The decline in poverty began from the early 1980s, largely as a result of a sharp decline (20%) in incidence of poverty in the rural areas as compared to urban areas. As of the NSS 55th round (1999-2000), the poverty levels (measured by the head count ratio) are at around 26% for all India, broken down into 27% percent for rural areas and 23.6% for urban areas. The gini index of income and consumption inequality was 37.8% for 1997. The quantum and incidence of poverty in rural areas have a far greater influence on the national average than that of urban areas as 70 percent of the total population lives in the rural areas. 4-3 There are wide regional disparities with regard to poverty levels within India. Eastern and North Eastern states still have poverty levels above 40%, and states like Haryana, Punjab, Kerala have poverty levels less than 10%. The head count ratio among the SC and ST population is very high at over 50%. The growth rate of employment has gone down between 1993 and 2000, and the decline is more marked in rural areas. The All India unemployment rate was at 7.32% in 1999-2000, with 26.6 million unemployed persons. The overall literacy levels are at around 65% (as of 2001), but female literacy is 20% lower than male literacy. The life expectancy at birth (2001) was 63.3 years.

4.2 Andhra Pradesh 4-4 Andhra Pradesh is one of the larger states in India, located in the South of the country. Around 73% of its population of 75 million lives in rural areas. The decadal population growth rate at 13.5% is much lower than the national average of 21%. The Net State Domestic Product at current prices was INR 1289 billion in 2000-01, and it went up to INR 1365 billion in 2001-02. The per capita income in the state was INR 14705 in 1999-2000 compared to INR 16047 for India. 4-5 Unlike in most states, urban poverty in Andhra Pradesh (26.63%) is much higher than rural poverty (11.05%). Moreover around 40% of the poor belong to the 20-35 age group indicating low employment for this category. Also around 10% of the poor belong in the old age group making them vulnerable.

8 UNDP HDR 2003




4-6 The growth rate for employment in both rural (0.29%) and urban (0.01%) Andhra Pradesh has not only declined but is lower than the all India figures (rural 0.67%; urban 1.34%) for the period 1993-94 to 1999-2000. Over 90% of the employment in Andhra Pradesh is in the unorganised sector and the incidence of child labour is very high. The sectoral distribution of workers in rural Andhra has remained more or less constant between 1983 and 2000, with around 79% of the population engaged in the primary sectors. 4-7 As per the Human Development Index of 1991, Andhra Pradesh ranks 23rd out of 32 states, and as per the HDI 2001 it ranked 10th out of 15 states. While the relative position has not changed much, the value of the HDI has moved up from 0.377 in 1991 to 0.416 in 2001. The overall literacy rate (61%) is lower than the national average (65%). 4-8 In terms of health indicators, life expectancy is more or less at par with national figures. The infant mortality ratio was slightly lower than the national average, but the maternal mortality ratio (159) was much lower than the all India figure (407). Andhra fares better than all India figures on access to safe drinking water and toilet facilities. 4-9 The gender related indicators convey a mixed picture. The enrolment ratio for girls in the six to eleven years age group (101) was lower than those for boys (104) in the state, but much higher than the corresponding all India figures (85). Literacy rates for women in Andhra are lower than national averages. Andhra Pradesh has a very high incidence of child labour, which is around twice the national average. Rural Andhra has 13.6% of girls in the age group 5-14 working compared to 11.4% of the boys working, the national rural averages being much lower at 6.3% and 6.6% respectively. 4-10 Andhra Pradesh has been the forerunner in the Self Help Group (SHG) movement in the country, however access to formal credit in rural areas is still wanting. The amount of bank finance extended through SHGs has gone up from INR 20 million in 1995-96 to INR 3,396 million in 2002-03. 4-11 While there are disparate claims regarding the extent of poverty reduction in Andhra Pradesh, a declining poverty level is a heartening phenomenon. The improved health indicators considered with mixed gender indicators indicates the need for further efforts in these areas. The SHG movement has not only helped improve access to finance but also improved status of women as the movement has been directed primarily at women. There is however much to be desired in terms of access to finance as the overall outreach of the movement has been limited despite the fact that Andhra Pradesh has attracted the maximum amount of government attention and funds for the SHG movement. 4-12 A comprehensive analysis is provided in Annex 1.




5 ENVIRONMENTAL ANALYSIS

5.1 Overview 5-1 Andhra Pradesh is the fifth largest state in India. The state is divided into three agro climatic zones, Coastal Andhra, Telangana and Rayalseema. Coastal Andhra is the richest agriculturally. There are hill ranges from the North to the South dividing the state into Western and Eastern or Coastal Andhra. 5-2 The temperature tends to be very high in summers, leading to frequent heat waves. Humidity is low, rainfall varies in different parts. Cosatal Andhra experiences very high rainfall and cyclonic conditions, which often lead to destruction of crops and disruption and damage to human life. Rainfall decreases from North to South in the state. 5-3 Of the total land area of 14.58 million hectares of arable land, around 72% is under dryland agriculture and only around 28% has irrigation facilities. Around 65% of the land area is covered under red soil. In Andhra Pradesh 23% of the total land area is covered under forest area, and a large part of this is dense forest cover. Forest cover in Andhra is dwindling because of smuggling of timber, illegal felling of trees due to lack of alternate livelihood options, and mining and sand and stone quarrying. 5-4 Andhra Pradesh has water from two major rivers – Godavari and Krishna. Besides these there are 37 small rivers. The Godavari basin has surplus water whereas the Krishna’s water is completely utilized. The ground water situation has been worsening and there is fluorosis in many areas.

5.2 Environmental Impact of Prospective Subprojects 5-5 The activities under the project are directed at enhancing incomes and income generation opportunities primarily in agriculture and allied activities, agro processing, cottage industries, small scale trading and small commercial activities. As the project activities will contribute to an enhancement in household incomes of rural families, it is likely to have an overall beneficial impact on the environment. Intensification of crop and livestock production will lessen marginal land degradation, livestock grazing on fragile lands (due to stall feeding) and cropping of the most infertile and erosion prone soils. 5-6 Notwithstanding the general positive environmental prognosis, individual sub project loans provided for certain micro-enterprises may occasion deleterious environment impacts. There is therefore a need to regularly monitor and mitigate these risks as much as possible. 5-7 Some illustrative examples of the possible harmful environment impacts from activities to be financed under the project are:




Agricultural production: To the extent that more and more land area is brought under cultivation, unplanned settlements and roads leading to that area are likely to lead to the irreversible loss of habitat. Increased agricultural production will also impinge on the sustainable use of water and land resources. Inappropriate use of pesticides may lead to impairment of surface and groundwater and soil quality. Agro processing industries: Ozone depleting substances could be in use in the refrigeration equipment. Also if chemicals are stored in godowns, handling and disposal of chemical waste becomes an issue. Livestock loans: Pathogens in manure from animal waste can cause diseases in humans if people come in contact with them. Food safety becomes a concern if manure application is inappropriate. Additional pressure on forests and land resources could result from incremental fodder needs. Non farm sector loans: Loans to cottage industry, artisans for handicrafts are not expected to have large impacts. There could be localized impacts due to the use of hazardous chemicals, emissions from fuel use and wastewater from washing and cleaning. Some cottage industries could use high value forest products such as timber, bamboo and fuelwood causing depletion of a resource faster than the natural rate at which the resource is replenished. Retail trade and business enterprise loans: Loans to retail trade are not expected to have any impact. There could be localized impact due to use of hazardous chemicals, emissions and waste generation for some business enterprise loans. 5-8 While some sub project loans could lead to some environmentally undesirable consequences, the micro/small scale of these sub project activities and the likely low intensity of lending in a given location/ area, should ensure that the environmental effects of the project as a whole should not be of significant concern. Nevertheless, in order to ensure maximum productivity of the loans and at the same time minimum adverse impact on the environment, desirable interventions to mitigate the possible harmful effects of these sub project loans as well as regular monitoring requirements have been specified. 5-9 A complete environmental analysis can be found in Annex 2.




6 THE PROJECT

6.1 Strategy 6-1 The considered opinion of most committees, as well as our assessment of the performance of RRBs converges on and underlines the need for unity of ownership and accountability i.e. for majority ownership and management control by a single stakeholder for effective functioning and viability of RRBs. Of the four stakeholders (Central Government, State Government, Sponsor Banks and NABARD), complete ownership and accountability with either the Central Government or State Government is unlikely to lend the required business focus while NABARD is well entrenched in its refinance and supervisory role and a triple role may not be prudent. Sponsor Banks, being engaged in similar business activity, are synergistically well positioned to take a lead role in ownership and management of RRBs, an opinion also voiced by the Finance Minister in his budget speech in June, 2004. This was also reiterated by the Ministry of Finance in a press statement on 30 November, 2004.9 We would go a step further and suggest that substantial synergies will be realised when the sponsor banks manage their entire rural portfolio including their own branches as single a strategic business unit. This project focuses on consolidation within a state and institutional revitalization of the consolidated entities to realign these entities to the mission in a sustainable way as a first step towards that goal. 6-2 The project proposes that RRBs in the state of Andhra Pradesh be consolidated under three banks which have significant operations in the state. The project will assist in this consolidation through TA support for change management encompassing structural, governance, human resources, policies, systems and products initiatives as also soft loan support for reaching a specified capital adequacy level at each consolidated entity level within 5 years. Changes are required in the legal framework, in particular in relation to the RRB Act. However, recognizing that legislative changes will take time, the project proposes to work through agreement among the stakeholders on key issues. The Components of the strategy are outlined below:

6.2 Structure 6-3 In Andhra Pradesh, State Bank of India (SBI) has sponsored five RRBs operating in eight districts and State Bank of Hyderabad (SBH) has sponsored four RRBs operating in four districts. Syndicate Bank has sponsored three RRBs operating in five districts. Andhra Bank and Indian Bank have sponsored two RRBs each, and each RRB operates in one district. 6-4 It is proposed to carry out the consolidation in two steps in restructuring RRBs in AP: 9 The public sector banks have been asked to merge RRBs with themselves keeping in mind the specific region of their operations. The urge to merge RRBs with the sponsor bank comes from two drivers. The MoF feels that with the merger the public sector banks would reach out to the rural areas and help in pushing up the rural credit take off…. The second reason is the sacricity of fresh capital..” Times of India, 1 December, 2004.




Step 1: Merging all RRBs sponsored by SBI 6-5 There are five SBI sponsored RRBs in AP. They are: Nagarjuna Grameen Bank covering the Nalgonda and Khammam districts. Sri Visakha Grameen Bank covering the Vishakhapatnam, Srikakulam and Vizianagaram districts, Sangameshwara Grameen Bank covering Mahaboobnagar district, Majeera Grameen Bank covering Medak district and Kakatiya Grameen Bank covering Warangal district, respectively. No legal changes are required for this amalgamation (as the RRB Act permits Amalgamation) and the stakeholders are the same across the RRBs (so there will be lower legal and institutional complexity). This initial exercise will enable the Project Implementation Team to get to grips with basic issues in such consolidation without too much complexity. 6-6 The proposed merger will also address the immediate requirement of fresh Tier 1 capital infusion with three SBI owned RRBs which have accumulated losses, by creating a single entity with a positive net worth. The project will provide Tier 2 capital and TA support as described below. 6-7 The table below presents a picture of what key parameters would have been had these banks been merged as of 31st March 2004.

Parameter Value Total Net Worth Rs. Million 1,202 Total Deposits Rs. Million 16,805 Total Net Advance Rs. Million 11,903 Total Branches 487

Total Staff 2315 Gross NPAs as % of gross outstandings 12% Total Profits Rs. Million 296 Profits/Avg. Assets % 1.3% No. of States involved 1 No. of Sponsor Banks involved 1 No. of RRBs involved 5

Step 2A: Merging all RRBs sponsored by State Bank group (SBI, SBH) Step 2 B: Merging RRBs sponsored by Indian Bank with Andhra Bank and Syndicate Bank 6-8 There are four RRBs in AP sponsored by SBH. They are: Golconda Grameen bank covering Ranga Reddy district (Hyderabad Rural), Sri Rama Grameen bank covering Nizamabad, Sri Shatavahana Grameen Bank covering Karimnagar and Saraswathi Grameen Bank covering Adilabad districts. All these four districts fall in Telengana region and are contiguous with each other as well as with geographical area covered by RRBs of SBI. Thus, it would make strategic sense for SBI to merge these RRBs, with the SBI RRBs, so that the entire RRB operational area of Telengana region would be covered by SBI.




6-9 Andhra Bank has sponsored two RRBs: Chaitanya Grameen Bank covering Guntur district and Godavary Grameen Bank covering East and West Godavari districts. 6-10 Syndicate Bank has three RRBs: Anantha Grameen Bank operating in Anantpur district, Pinakini Grameen Bank operating in Nellore and Prakasam districts, Rayalaseema Grameen Bank covering Kurnool and Kadapa districts. 6-11 Indian Bank has sponsored two RRBs: Kanakadurga Grameen Bank operating in Krishna district and Sri Venkateswara Grameen Bank covering Chittoor district. Indian Bank has a minor presence in AP and the two RRBs are located in two different regions (Rayalaseema and Coastal). Indian Bank may accordingly divest the two RRBs that it has sponsored in AP. In such a case, Andhra Bank could take over Kanakadurga Grameen Bank operating in Krishna district and Syndicate Bank could take over Sri Venkateswara Grameen Bank operating in Chittoor district.10 6-12 With the above restructuring, the RRBs in AP would be under three groups: State Bank group, Andhra Bank group and Syndicate Bank group. The merged entities would have the following parameters as of March 31, 2004: Parameter State Bank RRB

Holding Co. (9 RRBs of

State Bank group)

Andhra Bank RRB Holding Co. (3

RRBs under Andhra Bank)

Syndicate Bank RRB Holding Co.

(4 RRBs under Syndicate Bank)

Total Net Worth Rs. Million

1,961 549 2,628

Total Assets Rs Million 35,735 5,211 25,825Total Deposits Rs Million

24,800 3,832 19,203

Total Net Advances Rs Million

16,120 2,962 1,392

Total Branches 652 113 405Total Staff 3,011 474 2,239Gross NPAs as % of total o/s

11% 9% 5%

Total Profits Rs. Million 428 69 652Profits / Avg Assets % 1.3% 1.3% 2.7%No of States involved 1 1 1No of Sponsor Banks involved

2 2 2

No of RRBs involved 9 3 4 6-13 It is proposed that the three Sponsor Banks (SBI, Syndicate and Andhra Bank) be given operational control of the respective consolidated RRBs through a Memorandum of Understanding between GoI, GoAP and respective Sponsor Banks.

10 While a further consolidation of Andhra Bank RRBs with either State Bank or Syndicate Bank could have been considered, it is likely that Andhra Bank would wish to consolidate its rural presence in Andhra Pradesh. Syndicate Bank RRBs are among the best performing and it is expected that it will wish to retain these.




Eventually, the RRB Act would be suitably amended or repealed( to facilitate divestment by GoI and GoAP in favour of the respective Sponsor Banks). Sponsor Banks may then choose to merge RRB holding companies with themselves or retain them as 100% Subsidiaries and/or transfer Sponsor Bank rural commercial branches to the subsidiary. 6-14 The merging of RRBs, is proposed not just to enhance their financial size and derive scale economies but also restructure the institutions in terms of systems and operations. This is in order to make rural operations not just viable but a strategic business for the sponsor banks. The restructuring should address the issues of expanding outreach, Customer Relationship Management (CRM), Treasury Management, Information Technology (IT), Internal Control and Supervision as well as issues related to human resources include fresh recruitment, training, capacity building, performance management, staff redeployment etc. The project will support these initiatives as described below.

6.3 Laws and Regulations 6-15 The ideal solution will be for the RRB Act to be repealed and if the sponsor banks wish to retain their rural operations or the consolidated RRBs as separate legal entities, for such entities to receive licences from the RBI as scheduled commercial banks. The RBI could and perhaps should have a differentiated policy for regional banks (as different from national banks) in matters relating to expansion, risk management and other critical areas. However, at the minimum, for this project, certain key constraints imposed by provisions of the RRB Act have to be addressed, initially through MOUs/agreements among parties and eventually through amendments in the Act. The constraints are primarily of two types: A: Where the Act specifies what can be done e.g. proportion of shareholding

among the three shareholders, size of authorized capital etc. B: Where powers under the Act are given to the Central Government Clearly, any change in ownership structure of RRBs can only be done through legislative action. However, it should be possible for the Central Government, to rely on the sponsor banks’ actions in order to discharge its statutory obligations and to codify expectations and agreements appropriately. The list of such actions includes the following: Issue Current Situation Proposed Action Composition of Board of Directors

2 (GOI) + 1 (NABARD) + 1 (RBI) + 2 (Sponsor Bank) + 2 (State Government)

Majority to be nominated by Sponsor Bank, none by RBI/NABARD

Appointment of Chair & Salary of Chair

Approval required of GOI and NABARD

Deemed approval for Sponsor bank nominee within norms

Salary Structure To be determined by GOI Deemed approval for Sponsor bank action within certain norms




Issue Current Situation Proposed Action Board Committees and Remuneration of Directors

Approval required by GOI Deemed approval for Sponsor bank action within certain norms

Rules GOI can make rules on Board, Staff matters

GOI to desist other than rules to permit sponsor banks/ RRBs to make rules.

6.4 Governance 6-16 Governance in any institution is provided by the shareholders, the Board of Directors and Board Committees as also by senior management and regulatory authorities. However, the pivotal point through which all these players connect to governance is through the Board of Directors. At present RRB Board members function as interest groups representing the particular shareholder they represent. The central government nominees are generally concerned with lowering of interest rates and increased lending in specific areas/ villages rather than the smooth operation of the bank. The state government nominees keep changing often, as they are ex-officio, and their main concern is to get the RRB to cooperate with government programs in which loans are involved so that targets can be met. The sponsor bank nominee director sees the RRB as a poor cousin and a competitor at the same time. The NABARD and RBI nominee directors have conflicting roles as re-financiers, supervision agencies and regulators. The Boards need to be reconstituted to give sponsor bank a majority and to bring in required expertise through induction of independents. Pending legislative changes, this will need to done through agreement among the shareholders. The Boards have to be provided with adequate autonomy in decision-making and be held accountable for the overall performance of the RRB. 6-17 The project will work to improve the role perceptions amongst the reconstituted Board of Directors. The project will also provide intensive inputs to Board Committees in relation to their governance responsibilities in general and technical issues of current relevance in particular.

6.5 Operations 6-18 In order to strengthen the consolidated RRBs to cater to the needs of the rural economy for all kinds of financial services, diversification of their business has to be encouraged without losing focus on fulfilling the financial needs of the rural poor. RRBs will be encouraged to develop their own customer-segment specific products for deposits, term-investments, loans & advances etc. depending upon the needs of the local rural economy as also to enter into agency arrangements with the Sponsor banks or other financial institutions for extending various financial services including those for remittances and collections, cash management, engaging in foreign exchange business on a bank/ branch specific basis, crop and general insurance, trading in Government securities and other securities, pension of government employees in rural areas etc.




6-19 Several of the RRBs in AP are already doing this. For example Sangameshwara Grameen Bank, a SBI RRB has entered into cash management agreement with SBI and is also retailing life insurance policies for SBI Life Insurance Co. Crop insurance is being offered as part of the National Agricultural Insurance Scheme (NAIS). The project will leverage the internal experience of the RRBs to provide inputs to the others. This will be supplemented by TA support for capacity building for sourcing and developing new opportunities including negotiations with the State Government in respect of certain services such as payment of pensions for government servants, acceptance of guarantees and temporary deposits of government departments/undertakings operating in rural areas etc. Offering a complete array of services will improve the image of the RRBs as a professional organisation, thus attracting more customers. 6-20 RRBs should maximize their outreach. RRBs are currently providing around 11.8% of priority sector loans and around 15.4% of agricultural loans in AP in spite of having 32% of bank branches in AP. The outreach of the RRBs as well as their share in rural lending needs to be improved. Moreover, we must remember that the formal financial system addresses only a small portion of the total demand for these services. The project has built in specific support to each Consolidated RRB in sensitising and training its Board Members and officers in developing products and schemes, building linkages and undertaking a range of initiatives to extend the reach of the RRBs to women and the unreached and underserved. 6-21 Another important problem plaguing the system is recovery of loans. The project will aim to provide training and inputs to consolidated RRBs so that these organizations intensively use micro-finance best practices in their lending methodology. These include the group model, because this model has proven to be creditworthy. It could be through the SHG concept (recovery rate throughout the country is over 96%) but also, primarily for crop loans, through the JLG (joint liability group) model where the loans are individual loans but the whole group is liable for repayment. This will also improve social and poverty outreach as loans can be extended without collateral. Other micro-finance best practices that need to be mainstreamed are credit appraisal based on appraisal of income of the family from all sources, regular monitoring and recovery of loans at regular intervals (e.g. at the end of a crop season rather than the end of a year) and intensive use of technology so that staff can concentrate on human contact related tasks rather than book keeping and reporting. 6-22 In tune with the changing environment and rising customer preference for technology driven services in banks even in rural areas, consolidated RRBs will also be supported to introduce automated services like multi-service credit/debit cards, smart cards, automated teller machines, touch-screen services etc. at least on selective basis in select major branches.

6.6 Human resources 6-23 The RRBs have in general good human resources. To revitalize and reorient these institutions back to their Mission, a well thought out and coordinated strategy




for rationalizing and energizing human resources and strengthening the institutional frameworks at all levels will be required. 6-24 A particular issue to handle carefully and with sensitivity will be disbanding of multiple HOs. In Andhra Pradesh, upon full consolidation, we envisage 3 HOs (one for each consolidated RRB) with perhaps one or two area offices in the case of State Bank of India instead of the 16 HOs that are currently there. This will call for rationalization of staff positions to move a large proportion of HO staff back to field positions (and some to move up in the commercial bank business). As the banking sector in India has developed a lot of rigidities in terms of staff grade levels expected to be deployed in particular ways, this exercise will call for a lot of thoughtful planning and taking into confidence of affected staff members as well as staff and officer unions. 6-25 The RRB Act has a lot of rigidies in relation to staff matters with powers resting with the Central Government in relation to Wage structure etc. These will need to be alienated, initially through agreements and subsequently through legislative changes. 6-26 There are at least four distinct layers within each organization, which will need to be addressed for realignment, redeployment and revitalization of human resources.

The board The executive/senior management layer The supervisory layer Front line staff

Adaptive Challenges 6-27 Institutional Capacity

Governance issues have to be addressed – by a functioning ‘intelligent’ board

Banks have to take risk and lend sustainably Business development for the target clients should become the focus Managerial or operational efficiency should be ensured by proper

planning, executive initiative and monitoring /inspections/audit etc. from within as well as by stakeholder accountability.

6-28 Individual Capacity

At present the executive layer of these institutions are usually drawn from the sponsor banks. While this in itself is not an issue, focus on the Mission and accountability to the RRBs can be at least in some cases. This will need to be addressed. Staff may also require reskilling, specially in context of redeployment as well in context of introduction of new products, systems, technologies and approaches.




Steps in HR Strategy 6-29 The strategy should be built on developing the capacities of the four layers. 6-30 Individual’s Capacity

Building an alignment Developing a clear focus for each level Communicating priorities and requirements Developing required skills

6-31 Institutional Resilience

Orientation to the rural markets and rural poor Technology solutions Re-skilling challenges and exit routes for staff Recruiting/induction/skill development/compensation benefits/career

development strategies Role definitions/delegation, control supervision and monitoring Team development

6-32 An illustrative list of institutional capacity building inputs required at the four layers is provided below. This will need to be detailed and elaborated during project implementation. Layer Key Issues Key Inputs Governance ( Board)

Role of board, the board members has more responsibilities than rights

Norms about requisites for board members. Orientation workshops for board members Training in meeting management, secretarial tasks, etc. TORs for Committees, training for committee members

Managerial and supervisory levels

Operational efficiency. Concern for customer Openness to IT Anxiety about reviving the system Mission orientation Risk Aversion

Performance monitoring system Strong measures to deal with corruption Emphasis on recoveries Customer orientation, service quality etc. Credit appraisal and loan processing skills Appropriate IT based solutions for loan processing, tracking and CRM Innovation in service delivery Profit planning systems in place Standard norms about compensation etc. performance linked pay Orientation to team Job descriptions, manuals on procedures and systems

New perspectives to be absorbed

Changes in various systems, viz: Recruitment/enrolment – induction –




compensation benefits Career development – punishment –

grievance redressal – exit route Frontline staff Owing responsibility for

business growth and performance on twin criteria – away from bureaucratised control systems

Training in business orientation Strengthening business planning processes Individual/unit level goals and objectives Performance based evaluation Financial + livelihood support services Sensitivity to social issues – gender caste etc. Better understanding of pricing policies Delegation system/control and monitoring systems. Skills required by the contemporary banker Training on new products, procedures, systems and technologies

6-33 The Indian banking system has training institutions in place, therefore participating commercial banks will be provided with Project inputs to review their training modules, effectiveness and suitably of training and remodel the same to meet the requirement. There may also a need to develop mobile training units to ensure on the job training where the number of officers does not easily allow for someone to leave his work place for an extended period. The restructuring plan should include training plans for each target groups. With the help of training facilities complemented by external resource persons and trainers, the participant banks will elaborate adapted curriculum, and training schedule to reach a maximum of trainees.

6.7 Management Information System and Technology 6-34 The RRBs have good accounting systems in place although there are inconsistencies in application. Similarly required MIS reports are specified and are fairly clear as to what is required. The key issue is that compilation of reports is generally manual and very labour intensive. This coupled with a substantial ad-hoc reporting requirement from the multiple stakeholders puts a large burden on the branches which are generally tightly staffed leading to inadvertent mistakes and sometimes ‘rule of thumb’ reporting. An even more important issues is lack of action on reported trends, reducing the reporting to a matter of record rather than a decision making tool. 6-35 The project will work with the consolidated RRBs to rationalize report generation and strengthen usage of reports for decision making and for informing operating policy. 6-36 The management information systems in RRBs in AP are computerized partially. The Regional Rural Banks are in the process of automating their banking activities. Where computerization effort is on, the staff at both the H.O. and Branches are fully involved in the process. There is a systematic approach to the computerization; the plan and IT policy are in place.




6-37 The Computerization Plans of the Consolidated RRBs will need to build on these successes and take into account new products and procedures. 6-38 Communication is also nowadays an intrinsic feature of a modern organisation. To accelerate processing of information branches will be linked to HOs/Regional offices as required (based on business volume). 6-39 A study on technology application will be commissioned by the project to measure the opportunity to use new technology strategically. The main goal will be to increase efficiency in the system, and services to the members. Technologies initially identified for exploration include the usage of smart cards, low cost ATMs, and mobile computing. Use of handheld devices may be explored to capture transactions at the field level to improve customer service and to avoid duplication of data entry. This can permit the already scarce staff at the RRB branches to focus more on verification of data entered as also other developmental activities like fresh disbursement and intensified recovery. 6-40 Just getting the technology right is not enough, a plan to address motivation, training and resistance issues must be developed and the implementation be driven from the top. 6-41 The Project will support development of a Computerization Plan detailing the systems and procedures required to be followed for successful computerization. Staff will be identified, trained and motivated for faster and effective implementation of Information Technology to streamline MIS compilation and reporting to the appropriate authorities. The investments made for IT (hardware and software) would be monitored closely and remedial action taken in case of delays or improper/ inadequate utilization of hardware and software resources. 6-42 RFIs found to be separately taking up the exercise of software development with various unknown or local software development agencies having inadequate knowledge and experience about Banking Laws and Practice as also the MIS needs of the RRBs units. The project will support short-listing of reputed software agencies as also their Banking Software Applications after a thorough review and audit of the software applications available in the market. The project will also support Open Platforms as far as the Operating System, Databases and other telecommunication and utility programs are concerned. This would help RRBs units in substantially bringing down the cost of ownership as there would be significant savings on License Fees. Please see Annex 3 for recommended hardware and software configuration and indicative costing.

6.8 Control and Supervision 6-43 The need for a strong internal control system has to be recognized so as to improve monitoring of adherence to the statutory and the regulatory requirements as also to internal policy guidelines, operation of Risk Management and Assets-Liability Management Systems, Transparency and Disclosures and various Internal Control Measures. With the strengthening of the computer-based data management system and likely increase in number of branches as also their geographical span in view of




proposed consolidation, the emphasis should be more on off-branch surveillance of the branches to be integrated with the regular branch inspection process. The internal control system must be placed for overall guidance under an Audit Committee of the Board. The Audit Committee should be empowered for taking decisions on various aspects of an efficient internal control mechanism, review of the policies framed by the Board and its implementation, compliance to the regulatory obligations of the bank and ensuring integrity of information supplied to various regulatory or supervisory authorities, decisions relating to finalisation of annual balance sheets and profit and loss accounts as also accounting policies related thereto, review of audit of annual accounts and its compliance as also compliance of various inspections undertaken by the supervisory authorities. 6-44 The Sponsor Banks should streamline their supervision process of the RRBs in line with that being followed for rural commercial branches. 6-45 So long as RRBs remain independent legal entities, they will also need to be regulated and supervised as such. RBI needs to regulate these on the lines of commercial banks, albeit with a modified approach in line the regional (rather than national) operations. Supervision needs to be consolidated in a single supervisory authority, which at present would appear to be NABARD. However, it is critical that NABARD’s supervisory role vis-à-vis RRBs is clarified in relation to RBI’s regulatory role and that of sponsor banks exercising internal control. The project will provide support in this exercise of role clarification and norm setting.

6.9 Financial Restructuring 6-46 The three consolidated RRBs would have a positive net worth as on 31.3.2004 if the consolidation were carried as of that date. Two of these (Andhra Bank RRB and Syndicate Bank RRB) would also meet the extant capital adequacy requirements of 9%. If provisioning is increased to 50% of NPA and the target capital adequacy is 12%, the SBI Group RRBs require around Rs 1,600 million, as on March 31, 2004. The project will support the restructuring effort by providing step up coupon bonds on soft terms to enable the consolidated RRBs to absorb the additional provisioning requirements and to build up adequate capital to weather risks inherent in the business. Annex 4 provides a forecast of the SBI group RRBs under the following conditions.

Business growth in line with expectation of renewed focus on Mission Fresh NPA occurrence at 4%-5% of fresh loans Provisioning at 50% of NPA Less than proportionate increase in salary and establishment costs on

account of reduced HO requirements Step up coupon bonds of Rs. 1,600 Million for the SBI-SBH RRB Grant support for institutional revitalization including training, MIS and

technology support for all the three consolidated entities. 6-47 Sensitivity analysis to key assumptions has been carried out and shows the forecasts to be sensitive to business growth, provisioning assumptions.




6.10 Managing Risks 6-48 The rural/ poor households are vulnerable to a number of risks. Some of these are frequent, such as minor illnesses but have relatively little impact, while others can be infrequent, such as a cyclone, with great impact. While the former are best handled by dipping into one’s savings, or occasional borrowing, the latter require outside support, either in the form of insurance payouts or disaster relief. One can also distinguish between idiosyncratic and covariant shocks. Covariant shocks, such as drought, can affect all households in a locality while an idiosyncratic shock, such a theft, may be restricted to only a given household. 6-49 The poor adopt a mix of strategies depending on the severity and co-variability of the shocks. Self-insurance strategies include a) reduced consumption of food grains b) taking children out of school c) temporary migration d) diversification of income sources. It may be noted that some of the above strategies reduce the ability to withstand future shocks and thus if there are successive droughts or bouts of illness, then the family becomes more and more prone to risk. 6-50 Therefore, it is critical that the RRBs build inherent capacity to address the risk of its clientele as well as risk to its own sustainability in context of the risk proneness of its clientele by: • Expanding outreach of savings and insurance services to its members. The

project will focus on development of suitable products and linkages between insurance product providers and the RRBs.

• Mainstreaming micro finance best practices in the RRBs: best practices are being incorporated in each of the section of this strategy. A full review of products, procedures and processes will be carried out to introduce MFI best practices to the RRBs.

• Hedging the portfolio risk through weather derivatives: hedging agricultural risk is very difficult, but there are derivative products available (such as rain fall insurance) which could serve to mitigate risk. The project will provide support for pilot activities in this area.

• Disseminating commodity pricing and knowledge will enable the farmer to mitigate price risk. The project will implement pilots.

• Creating Risk Fund: If the agricultural lending is to be sustainable, without resorting to changes in prudential norms, it will be necessary to make adequate provision for normal risk and to include this risk cost in pricing. The project will facilitate product costing and sensitisation of top management to pricing based on costing taking into account normal risk. Further, financial restructuring support is being provided to take capital adequacy to 12% of risk weighted assets (as against the current regulatory requirement of 9%). Over time RRBs and other commercial banks need to be encouraged to build a risk fund from out of profits to cope with abnormal risk.




7 PROGRAMME FRAMEWORK 7-1 The Programme Framework is summarized below. Details are at Annex 5.

Design Summary

Measurable Indicators

Monitoring Mechanism

Assumptions And Risks

GOAL Sustained rural economic growth and reduced rural poverty incidence in Andhra Pradesh

Reduced rural poverty incidence by 3% in Andhra Pradesh Maintained economic growth rate of 7% in Andhra Pradesh

Economic reform program assessment of Andhra Pradesh

Impact monitoring report Program completion report (PCR)

Program Performance Audit Report (PPAR)

PURPOSE Establish a sustainable rural finance system using the RRBs in the state through policy, legal, regulatory and institutional reforms

RRB restructured to operate as sustainable autonomous institutions Enhanced profitability of the RRB Greater availability of affordable rural financial services

Program reports and reviews

Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) assessment reports

ADB review missions

PCR

Commitment of the Government of India and state government to pursue economic policy and agriculture reforms that enable RF institutions to operate autonomously within a liberalized financial policy regime

OUTPUTS I- 16 RRBs consolidated to 3 mainly through consolidation of RRBs under same Sponsor Bank

Management responsibility vested with respective Sponsor Bank Single Head Office for each of the 3 consolidated RRBs Branch rationalization for increased efficiency Assessment of changes required in business strategy and operations of the RRBs by respective Sponsor Banks

Program reports and reviews RBI, NABARD, and RRB assessment reports

ADB review missions reports

II- Improved legal framework for sustainable operations and increased autonomy and good governance for the RRBs

Certain key constraints imposed by the RRB Act to be addressed, initially through MoU between stakeholders and eventually through repeal/ amendments to the RRB Act and amendment of BR Act.






Design Summary




BoDs to be made more autonomous as well as accountable initially through agreement/ MoU between stakeholders and eventually through legislative change BoDs to be reconstituted to give sponsor bank a majority and to bring in required independence and expertise through induction of independent directors and RF experts. Improvement in role perception of Board members through training and sensitization programmes Audit and Risk Management committees set up Code of good governance adopted Internal control system set up in each RRB Computer based data management systems strengthened to facilitate off-site surveillance

III- Sustained institutional reforms Transformed RRBs to efficiently provide affordable rural financial services

Improved operating efficiency, loan collection, larger range of products and more efficient savings mobilization Increased outreach especially to target segment Improved HR practices, increased staff motivation Increased profitability Strategic use of technology


RBI, NABARD, RRB assessment reports


Institutional strengthening and improved governance will discourage politicization of RRBs Conducive local economic environment for operation of RRBs

INPUTS Legal and Policy Reforms Institutional reforms Consolidation and Implementation Support Financial Restructuring Contingency TOTAL

Rs million

5

379

78

1600

203

2,265

=USD 50 million




7.1 Budget Overview 7-2 A summary of the proposed budget for the project is presented hereunder. The detailed budget is provided at Annex 6.

Amounts in Rupees ADB GoAP

RRBs/ Sponsor Banks

NABARD/ RBI Total

1 Policy and Legal Reform 5,220,000Workshops 900,000 900,000Short Term Consultants 4,320,000 4,320,000

2 Institutional reforms 379,215,000Role Sensitization 2,745,000 2,745,000Training 75,780,000 75,780,000Short Term Consultants 53,100,000 53,100,000Computerization 247,590,000 247,590,000

3 Consolidation and Implementation Support 77,736,000Implementation Team 8,928,000 1,440,000 31,104,000 2,304,000 43,776,000Dom & Intl support 32,760,000 32,760,000Communication 1,200,000 1,200,000

4 Financial Assistance 1,600,000,000 1,600,000,000

5 Contingency 202,732,000 202,732,000

Total project for RRBs 2,230,055,000 1,440,000 31,104,000 2,304,000 2,264,903,000In US$ terms US$ 49,557,000 US$ 32,000 US$ 691,200 US$ 51,200 US$ 50,331,000

Exchange Rate 45.00

7.2 Implementation Schedule 7-3 The implementation of the project will take place over four years and will be divided in three phases. The implementation schedule is presented at Annex 7. Phase I Preparation including agreements among GoI, GoAP and

sponsor (6 months) Banks and establishment of Project Implementation Unit and

detailing of implementation plan Phase II Consolidation of SBI RRBs, Valuation of equity stakes for Phase

II (12 months) consolidation and fine tuning of implementation plan Phase III Balance consolidation and improved operations stabilize. (30 months)




8 IMPLEMENTATION ARRANGEMENTS 8-1 A number of stakeholders are involved in this project. It will be critical that sponsor banks have substantial flexibility in regard to the detail of the restructuring as this project will be seen as a pilot, based on the performance of which, the balance of the restructuring may progress. It is accordingly proposed that while NABARD would be the pass then agency for the financial assistance, there be a Project Implementation Unit (PIU) with direct responsibility to MOF to steer the project. The Project Implementation Unit will be supported by short and long term consultants and provided guidance by a steering committee comprising representatives of MOF, RBI, NABARD, GOAP and the three sponsor banks.




9 ROLES AND RESPONSIBILITIES 9-1 There are several stakeholders (GoI, GoAP, RBI, NABARD, Sponsor Banks) and while each of them would stand to benefit from the project in the long term, the immediate perception of the importance and relevance of the project may not be similar across all stakeholders. It is therefore important that clear roles and responsibilities are established right upfront and each stakeholder is held responsible for delivering on these responsibilities. Government of India 9-2 This project is directly emerging from an agreement between ADB and GoI, the main responsibility of GoI will be to ensure that a favourable environment is created. GoI will:

• Sign agreement with ADB, GoAP and the Sponsor Banks including to give sponsor bank deemed approval for actions requiring GOI approval under RRB Act (within specified norms)

• Give the PIU the implementation responsibility along with adequate power and resources

• Give effect to modification to the RRB Act and BR Act based on RBI’s recommendations to facilitate smooth implementation of the project

• Ensure that required financial assistance including downstreaming of ADB assistance is available in a timely manner

• Clarity NABARD’s supervisory role and effect necessary legal amendments in consultation with RBI and NABARD.

Government of Andhra Pradesh 9-3 Though GoAP is only a minority shareholder (15%), it is a key stakeholder in that stronger RRBs will improve the provision of rural finance in the state, thereby promoting robust economic growth. GoAP will therefore be one of the main beneficiaries of a successful project. Hence, GoAP needs to create the right environment for successful implementation of the project. GoAP will have to:

• Sign MoU with GoI, ADB and the Sponsor Banks • Agree to reduction/ dilution of state government representation on Boards • Provide full cooperation to the Implementing Agency • Agree to eventual exit from equity and Board

Reserve Bank of India 9-4 All banking matters are under the purview of RBI. Consolidation of RRBs is likely to create stronger entities, and therefore, as the regulator, RBI would stand to benefit from the successful implementation of this project. Some of the key responsibilities of RBI will be to:




• Propose modifications to the RRB Act and BR Act based on the

Implementation Agency’s recommendations • Where such modification is not feasible within the available timeframe, to or

cause to issue interim orders to facilitate smooth implementation of the project • Monitor the progress and make adjustment as and when required • Align regulatory norms for RRBs with those of commercial banks.

National Bank for Agriculture and Rural Development 9-5 NABARD, since its inception, has been granted the responsibility for the inspection of the RRBs, their development and refinance. NABARD will have a key role in facilitating the project. NABARD will have to:

• Ensure that the development focus of the RRBs does not get diluted as a result of implementation of the project

• Ensure standardisation of MIS and accounting through computerisation and automation

• Establish state-of-the-art processes for off-site and on-site inspection/ supervision for RRBs

• Proactively review progress of RRB reform, identify and implement course corrections in consultation with stakeholders.

9-6 NABARD will also be the pass through Agency for the financial assistance to be provided. Sponsor Banks 9-7 This should be a strategic opportunity for sponsor banks to expose consolidation of market share in rural markets in a sustainable way. The project success will be highly sensitive to the sponsor banks’ approach and management attention. Sponsor banks will need to:

• Sign agreements with GOI, GOAP and NABARD • Set up a project implementation cell reporting to top management to plan,

detail and implement various aspects of consolidation and change management.

• Proactively define their requirements, identify constraints and lead dialogue at the Steering Committee.

• Agree to a time bound plan of action and actively engage stakeholders including staff and officer’s unions for smooth implementation.

• Appoint directors as per agreement with GOI and adopt code of god governance

• Establish outreach/market share goals and incorporate these into the business plans of the RRBs.

• Examine ways to manage the entire rural business in AP as a strategic SBU irrespective of RRBs being separate entities.

• Implement branch computerization plan in line with business volume norms and branch supervision system in line with that used for their own branches.




• Implement institutional strengthening measures as per agreed plans, monitor progress and carry out course corrections as required.

Project Implementation Unit 9-8 The PIU will have the responsibility of coordinating the entire project and ensuring the buy-in of all the stakeholders. Whilst a comprehensive scope of work for the implementation agency will need to be developed at the time of its selection/ appointment, the broad terms of reference would include

• development of a detailed work plan for project implementation • identification of key legal and regulatory constraints and ways and

means to deal with the same in the short term and long term including drafting of agreements, norms, amendments to relevant laws and guidelines

• discussion with all stakeholders and identification of their concerns and ways of addressing the same

• determination of fair value of various merging RRBs to facilitate fair payoffs to disinvesting shareholders

• hand holding the merging entities and their respective sponsor bank through the technical aspects of the merger, including Company Law, BR Act and RRB Act issues

• coordinating and facilitating the institutional reform support efforts through appropriate technical and financial inputs

• preparing and disseminating background information and progress reports for review of the Steering Committee so that informed decisions can be made at such meetings.




10 POLICY MATRIX

Objectives Rationale First Tranche Second Tranche

(Within 12 months of the First Tranche)

Third Tranche (Within 18 months of the Second Tranche)

The goals of the proposed Rural Finance Sector Restructuring and Development Program are to ensure sustainable access to institutional financial services for a majority of rural households in Andhra Pradesh. Specific objective is to establish a sustainable rural finance system using the RRBs in the state through consolidation and reforms in policy and legal and regulatory framework and institutional development.

(I) Creating a Favourable Policy Environment, Facilitating Legal Framework and Good Governance

Address the key constraints imposed by the RRB Act and create a conducive legal framework for sustainable operations

The RRB Act in its current shape imposes codifies a number of issues such as equity structure which ought to be dependent on business decisions. Moreover, it requires that a number of actions, which ought to be within the preview of the Board of RRBs, be approved/determined by GOI. Focus shall be on strengthening good governance, creating conducive policies, promoting strategic initiatives, restructuring potentially viable

MoU to be signed between various stakeholders as an interim measure to address the constraints imposed by the RRB Act. Reconstitution of the Boards of RRBs to include more professional directors and reduce the preponderance of government nominees GoI to provide deemed approval for actions within norms through agreements with Sponsor Banks

Training and Role Sensitization to be carried out for members of the reconstituted Boards Audit and Risk Management Committees to be set up Code of good governance to be adopted by all RRBs Internal control systems set up in each RRB Computer based data management systems to be strengthened to facilitate off site surveillance

Legislative changes to the RRB Act and BR Act to be enacted.







entities, and granting autonomy for business decisions.

(II) Implementing the Consolidation

Consolidating the existing 16 RRBs in Andhra Pradesh into 3 RRBs under different Sponsor Banks

All AP RRBs under a single Sponsor Bank to be consolidated into a single RRB so as to benefit from economies of scale as well as reduced operational expenses.

Preparation including agreements among GoI, GoAP and sponsor Banks and establishment of Project Implementation Unit and detailing of implementation plan.

Consolidation of SBI RRBs and identification of issues/ impediments as well as solutions to the same in order to facilitate smooth implementation of the second phase of consolidation.

Consolidation of SBH RRBs with the SBI RRB and the remaining 7 RRBs under two different sponsor banks so that finally, there are 3 consolidated RRBs operating in Andhra Pradesh.

(III) Institutional Reforms for Sustainability

Institutional transformation of RRBs into sustainable rural finance institutions for providing affordable services to the target segments

Though financially RRBs have performed better than the CCS, they have largely not met outreach expectations. Considering the potential contribution of RRBs in enhancing outreach, it is important to make RRBs more robust through fundamental changes in

Adoption of RRB Institutional Development and Integration Plan. The Plan to cover (i) governance; (ii) human resources; (iii) products and services; (iv) business models and processes; (v) management information system; (vi) auditing and accounting; and (vii) performance benchmarks.

Execution of the Institutional Development and Integration Plan, including

• Initiation of training for managerial as well as frontline staff to improve operating efficiency, loan collection

• Design and development of a larger range of products better suited to the requirements of the rural masses

• Improved HR practices

Completion of Institutional Development plans and integration plans to ensure seamless integration of merging RRBs and increased outreach, especially to the target segment.







governance, organization, human resources, business process, and products and services.

resulting in improved staff motivation

• Strategic use of technology to increase efficiency as well as internal/ external supervision

• Improved internal control and supervision

• Use of micro finance best practices to reach out to the underserved and unreached.

• Implementation of mechanisms to better manage risks including improved capital adequacy.




11 RISK ANALYSIS AND MITIGATION 11-1 Political risk: The stability of the Government, both at the Centre as well as the State is crucial to the success of the project as key decisions require formal approval of the Government. Any instability will inevitably lead to delays in implementation even if it does not result in defocusing the approach to the project. Indiscriminate statements and promises by political leaders such as loan and interest waiver which are contrary to the financial norms and discipline can be detrimental to the outcome of the project. Populist policy measures such as declaration of floor and ceiling on interest rates and general subsidies would also have a deleterious impact on the project. 11-2 Such risks can be minimised through upfront agreement between stakeholders including GoI, GoAP, RBI, NABARD, Sponsor Banks and ADB. 11-3 Economic risk: Macro-economic stability of the country is a pre-requisite to financial sector stability in the country. Stable macro-economic indicators such as the low inflation rate, fiscal deficit as per the plan or budget, steady or planned growth rate of the economy, low volatility in the foreign exchange market, manageable trend in balance of trade, etc. will have a minimal impact on the sectoral policies, especially in the financial sector. The Reserve Bank credit policy, including the interest rates, is highly linked to these macro-economic indicators. Any adverse fluctuation in them could result in sharp measures, which may have an indirect impact on the project. Some of the risks of course are linked to global phenomenon such as rise in crude oil prices, and hence can not be controlled. 11-4 In case, there are changes in financial sector policies in view of macro-economic disturbances, there is a possibility of indirect impact on the project. However, unless there is a severe macro-economic instability, the project outcomes are expected to be normal. 11-5 Sector policy risk: Although the need for financial discipline and improvement of the viability of the rural financial institutions are recognized as important parameters governing rural financial sector policies, sometimes these are vitiated or relaxed in view of attaining other objectives such as increased credit flow to chosen sectors or sections of the people. Such policy variation can create confusion during project implementation and might have an indirect impact on the project. 11-6 Micro-finance as a tool for higher access to institutional finance for the poor has been recognised by NABARD, the Reserve Bank of India and Finance Ministry, Government of India. However, the over-emphasis on SHG as a means for directing funds for various programmes could send a wrong signal to the micro-finance sector if the achievement of quantitative targets is emphasized at the cost of quality. 11-7 The project envisages certain policy level changes to be incorporated in due course, which will help in bringing about structural changes in the rural finance sector leading to better monitoring and control. The acceptance of the recommended changes is contingent on several players and finally has to accepted and implemented by the State Government, Central Government, RBI, NABARD and the




Sponsor Banks. The extent to which the recommendations would be acceptable and changed might have an influence on the project outcomes. 11-8 It will be critical that decision makers in the Central Government, the Reserve Bank of India, Government of AP, NABARD and Top Management of the Sponsor Banks are exposed to success stories of financial sector consolidation . This will lend veracity to the project outlined. 11-9 Operational Risk: There is a possibility of resistance to the proposed changes being advocated for consolidation of RRBs. structural changes being suggested with an objective of higher accountability of the staff and improving the efficiency can find resistance at various levels in the existing system. There is also a risk of delayed adaptation of changes in systems and processes as envisaged in the project, which might lead to delays in achieving the desired results. Moreover, there is always a risk of failure due to unforeseen circumstances such as drought or any other natural calamity as the RRBs cater to the rural economy, especially agriculture. 11-10 It will be critical to sensitise the key players and senior management to issues in change management through discussions, training cum exposure visits as well as through assistance provided by experts. This will enable the people to understand the complexity involved therein and the cost-benefits of such a change.


Final Report Volume 2: Andhra Pradesh RRB Project - Annex 1

October 2005 Page 1

ANNEX 1: SOCIAL, POVERTY AND GENDER ANALYSIS

1. INDIA 1.1 POVERTY

1.1.1. Trends of Poverty in India 1-1 In the first three decades after independence, there has been increase in the overall poverty1 in the country (Refer Table 1). The decline in the poverty in the country has been observed from the eighties. The decline can be attributed to a sharp decline (20%) in incidence of poverty in the rural areas as compared to urban areas. Even with this scale of achievement, the poverty levels are as high as 27 percent in the rural areas. The quantum and incidence of poverty in rural areas have a far greater influence on the national average than that of urban areas as 70 percent of the total population is in the rural areas. Hence eradication of rural poverty through various policies and programs has been the focus of the both Central and State Governments in India. Table 1: Trend of Poverty in India Survey Period Head Count Index NSS Round Rural Urban National3 (Aug 51-Nov 52)

47.37 35.46 45.31

10 (Dec 55-May56)

48.34 43.15 47.43

20 (Jul 65-Jun 66) 57.60 52.90 56.7132 (Jul 77-Jun 78) 50.60 40.50 48.3642 (Jul 87-Jun 88) 39.23 36.20 37.6952 (Jul 95-Jun 96) 37.46 28.04 35.0055 (1999-2000) 27.61 25.09 -Source: Jha, 20012

1.1.2 Spatial Distribution of Poverty 1-2 Even though there has been overall decline in the poverty level in the country, there are still pockets of high poverty levels (Refer Table 2). The states like Bihar, Jharkhand, North-Eastern states, Orissa still have poverty ratios at more than 40 percent of population. On the other hand, states like Punjab, Haryana, Kerala have poverty ratios at less than 10 percent of population.

1 The Indian Planning Commission defines the poverty line as a per capita monthly expenditure of Rs 49 in rural areas and Rs 57 in urban areas at 1973-74 prices. This definition corresponds to expenditure sufficient to provide , in addition to basic non food items that is clothing and transport, a daily intake of 2400 calories in rural areas and 2100 calories in urban areas. 2 Jha, Raghbendra, (2001) “Economic Reforms, Economic Growth and Anti-Poverty Strategy in India” IFAD Report



October 2005 Page 2

Besides this disparity, the high level of growth of poverty in backward areas of Maharastra, Assam, South-western Madhya Pradesh, Arunachal Pradesh and Himalayan regions of West Bengal is also a great concern. Table 2: Characteristics of Rural Poverty Change between 1987-88 and 1993-94 Low and Increasing High and Increasing Manipur plains, Himachal Pradesh, Harayana, Uttranchal, Mizoram

Northern, Central and Eastern Maharastra, South-western Madhya Pradesh, Assam, Arunachal Pradesh, Manipur hills Himalayan regions of West Bengal

Low and Decreasing High and Decreasing Inland and Southern Andhra Pradesh, Saurastra region of Gujarat, Coastal and Inland Eastern Karnataka, Malwa and North Madhya Pradesh, Punjab, Coastal Maharastra, Goa, North-eastern Rajasthan

Central and Northern Bihar, Central and Eastern UP, Inland Northern Karnataka, South, South-west and Central Madhya Pradesh, Orissa, Southern Rajasthan, Sikkim, Eastern, Western and Central parts of West Bengal, Coastal and Southern Tamilnadu

High indicates Head Count Ratio over 40 percent in 1993-94 and Increasing refers to growth rate over 5 percent( Jha 20013 ) 1.2 EMPLOYMENT AND UNEMPLOYMENT

1-3 Poverty is an upshot of low income and unemployment, especially in the rural areas (Refer Table 3). There has been decline in growth rate of employment in the period 1993-2000, mainly due to low economic growth rate in the rural areas. Correspondingly, an increase in both absolute unemployment (20 million in 1993-94 to 27 million in 1999-2000) and its growth rate in the country has been observed. Moreover, the number of unemployed persons is greater in the rural areas as compared to urban areas and so is its growth rate, primarily due to near stagnation of employment in agriculture. Table 3: Employment and Unemployment Status in person years Million Growth per annum

(%) 1983 1993-

941999-2000

1983 to 1993-94

1993-94 to 1999-2000

3 Jha, Raghbendra, (2001) “Economic Reforms, Economic Growth and Anti-Poverty Strategy in India” IFAD Report



October 2005 Page 3

Million Growth per annum (%)

1983 1993-94

1999-2000

1983 to 1993-94

1993-94 to 1999-2000

All-India Population 718.20 894.01 1003.97 2.00 1.95Labour Force 261.33 335.97 363.33 2.43 1.31Workforce 239.57 315.84 336.75 2.70 1.07Unemployment rate (%)

8.30 5.99 7.32

No. of Unemployed 21.76 20.13 26.58 -0.08 4.74 Rural Population 546.61 658.83 727.50 1.79 1.67Labour Force 204.18 255.38 270.39 2.15 0.96Workforce 187.92 241.04 250.89 2.40 0.67Unemployment rate (%)

7.96 5.61 7.21

No. of Unemployed 16.26 14.34 19.50 -1.19 5.26 Urban Population 171.59 234.98 276.47 3.04 2.74Labour Force 57.14 80.60 92.95 3.33 2.40Workforce 51.64 74.80 85.84 3.59 2.32Unemployment rate (%)

9.64 7.19 7.65

No. of Unemployed 5.51 5.80 7.11 0.49 3.45Source: Economic Survey, 2003-04, published by CSO 1.3 LIVELIHOOD CHARACTERISTICS OF RURAL POOR IN INDIA

1-4 The rural poor primarily depend on agriculture for their livelihood as 74 percent of them are engaged either as agricultural labour or in activities indirectly related to agriculture indicating that there is limited opportunity for the poor in other sectors in the rural economy and a high level of dependence on agriculture for livelihood despite low wages and unemployment. Around 42 percent of the rural poor belongs to scheduled caste and scheduled tribes (Refer Table 4) and hence constitute the most vulnerable section of the population. Table 4: Livelihood Characteristics of Rural Poor in 1993-94 (figures in percentage) Social Groups Livelihood category Scheduled

TribeScheduled

CasteOthers All

Households (HHs)

Self-employed HHs in 0.75 2.38 7.70 10.83



October 2005 Page 4

Non-Agriculture Agricultural Labour HHs

6.49 16.19 18.91 41.59

Other Rural Labour HHs

1.45 2.40 3.98 7.83

Self-employed HHs in agriculture

5.62 4.76 22.49 32.87

Other ( Residential HHs)

0.73 1.46 4.69 6.88

All Households 15.04 27.19 57.77 100Source: Sarvekshana, 2000, published by NSSO 1-5 Ninety four percent of the Scheduled Caste (SC) population are marginal farmers possessing less than 2 hectares of land (Refer Table 5). Similarly 72 percent of the Scheduled Tribe (ST) population belongs to marginal farmer category having mostly non-arable forest lands. The other striking feature is Head Count Ratio of poverty among SC and ST is 50.3 and 54.3 respectively, signifying that sizeable portion of the poor belongs to these categories. The concentration of the ST population primarily is in Santhal Parganas in Jharkhand and Bastar in Madhya Pradesh whereas SC population is dispersed throughout the country. Table 5: Percentage distribution of households across land holding for select target groups in 1993-94 Land Holding in hectares

Scheduled Caste

Scheduled Tribe

<0.01 16.95 11.00.01-0.04 52.13 28.410.41-1.00 16.51 22.461.01-2.00 8.84 20.072.01-4.00 3.88 20.07>4.00 1.69 4.97All Categories 100 100Head Count Ratio 50.3 54.2Total Population in million 123.4 63.2Source: National Sample Survey Organization, Report No. 422 1.4 SOCIAL AND GENDER INDICATORS

1-6 Though there has been a considerable improvement in literacy rates for both males and females since independence, female literacy is still about 20 percent lower than that of males (Refer Table 6). The adult literacy rate of India is far lower than that of China and Sri Lanka (UNDP Human Development Report, 2003). Similarly, while there has been an improvement in health related parameters, much still needs to be done.



October 2005 Page 5

Table 6: Trend of Select Social Indicators in India Particulars 1951 1991 Current Literacy- male (%) 27.16 64.13 75.85

(2001)Literacy- female (%) 8.86 39.29 54.16

(2001)Literacy- total (%) 18.33 52.21 64.84

(2001)Crude Birth Rate (per 1000 population) 40.8 29.5 29.5

(2002)Crude Death Rate (per 1000 population)

25.1 9.8 8.1 (2002)

Infant Mortality Rate (per 1000 live birth)

146 80 64 (2002)

Maternal Mortality Rate (per 100,000 live birth)

NA 437 (1992-93)

407 (1998)

Life Expectancy at Birth-Male 37.2 59.7 (1991-95)

63.9 (2001-06)

Life Expectancy at Birth-Female 36.2 60.9 (1991-95)

66.9 (2001-06)

Source: Economic Survey, 2003-04



October 2005 Page 6

1.5 ACCESS TO CREDIT

1-7 According to All India Debt and Investment Survey 1992, households in the lowest asset base category depend primarily on non-institutional sources for their borrowing needs in the rural areas (Refer Table 7). With increasing asset base, the proportion of households accessing formal credit as well as its share in total outstanding increases. The picture is similar in urban areas. This means that informal sources of finance are still critical for poor with low asset base. Table 7: Proportion of Households Reporting Debt and Share in Total Amount Outstanding According to Credit Sources and Asset Group, 1991 Asset Group (Rs 000)

RURAL URBAN

Institutional Agencies

Non Institutional Agencies

Total Institutional Agencies

Non Institutional Agencies

Total

P S P S P S P S P S P S <5 5.3 37.1 14.2 62.0 18.

9 100 2.9 31.7 14.2 65.7 16.1 100

5-10 9.8 38.4 22.2 56.8 30.7

100 4.9 23.0 19.5 72.4 23.1 100

10-20 10.7 35.2 21.3 52.0 30.2

100 8.8 37.3 20.3 58.8 27.1 100

20-30 15.5 55.7 19.4 38.0 32.2

100 8.1 36.9 17.4 52.5 24.8 100

30-50 15.3 46.9 20.3 50.4 32.6

100 11.2 42.0 19.4 53.2 27.3 100

50-70 15.8 47.6 19.7 49.2 31.9

100 12.0 51.5 18.4 47.3 27.6 100

70-100 16.8 49.8 20.7 46.3 33.1

100 12.4 47.3 23.3 48.0 32.7 100

100-150

19.4 52.2 21.5 41.3 35.3

100 19.0 82.4 18.8 16.4 31.8 100

150-250

20.2 58.8 19.6 27.8 38.2

100 21.2 72.0 14.2 24.4 31.1 100

250 and

above

25.5 56.6 20.0 39.6 32.0

100 11.8 64.3 18.0 32.0 26.9 100

Total 15.6 56.6 20.0 39.6 32.0

100 11.8 64.3 18.0 32.0 26.9 100

N.B. (I) Debt comprises cash loans and current liabilities (II) Total includes unspecified; P=proportion of households reporting (percent), S = Percentage share in total Source: All India Debt and Investments Survey (1991-92) reported in RBI Bulletin, February 2000



October 2005 Page 7

2. ANDHRA PRADESH 2.1 DEMOGRAPHY 2-1 Andhra Pradesh is the third largest state in India with an area of 275,000 sq. km and is located in Southern region of India. The climate is generally hot and humid. The annual rainfall is 125 cm. The Krishna and Godavari are the major river systems in the state. The total population in Andhra is 75 million, the density of population being 275 as per the 2001 census, up from 242 in 1991. The ratio of rural to urban population is 72.9%. The decadal population growth rate (1991-01) for Andhra Pradesh at 13.46% was quite low compared with the national growth rate of 21.34%. The Sex Ratio in 2001 was 978, slightly higher than 972 in 1991. Table 8: Population Details of Andhra Pradesh

(in millions) 1991 % to

total2001 % to

total Total Population

66.51 75.73

Rural 48.62 73.1 55.22 72.9 Urban 17.89 26.9 20.51 27.1 Male 33.72 50.7 38.29 50.6 Female 32.78 49.3 37.44 49.4 SC and ST 14.79 22.2 17.36 22.9 Source: Census of India, 1991 and 2001 2.2 ECONOMY 2.2.1 Net State Domestic Product The Net State Domestic Product (NSDP) in Andhra at current prices is estimated at INR 1289 billion in 2000-01 as against INR 1356 billion in 2001-024. Share of NSDP at 1993-94 prices in 1998-99

1. Agriculture and allied activities - 34.0% 2. Mining - 1.5% 3. Manufacturing - 12.8% 4. Construction - 5.3% 5. Electricity, gas & water supply - 1.3% 6. Services - 45.0%

4 Advance Estimate, Economic Survey 2003-04



October 2005 Page 8

Services contribute the highest to the state domestic product followed by agriculture. The latter is mainstay of the economy in rural areas. The Net State Domestic Product (NSDP) of Andhra Pradesh multiplied (nearly thirteen fold) from INR 77.5 billion in 1980-81 to INR 1105 billion in 1999-2000. The per capita income in 1999-00 at current prices for Andhra Pradesh was at INR 14705 as against INR.16047 for India. 2.3 POVERTY TRENDS IN ANDHRA PRADESH 2.3.1 Decomposition of Rural and Urban Poverty in Andhra Pradesh Rural Sector Andhra Pradesh is one of the ten states where the rural poverty level (based on head count ratio) in the state was lower than all-India poverty levels. All of these ten states had mean income levels higher than all-India level. In most of the states, more than 50% of the total difference between the national and state poverty level was explained by the high mean income levels of these states. Urban Sector Andhra Pradesh is one of the 7states out of 15 states which had poverty levels higher than the All-India poverty levels. All these states had mean income levels lower than all-India level. Though the states had low income levels, distribution wise, they were “better off” than all-India. Andhra had a Gini of 0.33, and it ranked 9th among the 15 states, which shows a higher than average inequality of income. Rural Poverty Ratios in Andhra Pradesh5 The official estimates from Government of India show low rural poverty (15.9%) in A.P. On the other hand, other estimates of rural poverty incidence suggest a significantly higher head count ratio in rural Andhra Pradesh. In a study on prices and poverty in India, Deaton (1999) estimated unit prices for different states for the years 1987-88 and 1993-94. Deaton’s estimates suggest that the rural poverty line for Andhra Pradesh is more or less similar to All India figures. According to his estimates, rural poverty ratio for Andhra Pradesh ranges from 29 to 33% in 1993-94. The GOAP has also been using a higher poverty line (Rs. 187 in 1993-94), based on which the rural head count ratio comes to around 27 % in 1993-94.

5 ‘Poverty Alleviation Programmes in Andhra Pradesh - An Assessment’, 2002, Planning Commission – Government of India



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Table 9: Different Estimates of Rural Poverty for Andhra Pradesh: 1993-94 in (%) Studies Head Count Ratio Expert Group Method GOAP Deaton, A.

15.9 27.0 33.0

Note: Deaton's numbers range from 29 per cent to 33 per cent. Source: Rural Poverty Reduction Task Force Report (GOAP, 2000)

Based on the three different methodologies, the rural poor population in Andhra Pradesh in depicted in the following Table 10. The proportion of rural population in total population of Andhra Pradesh in 1991 was 73.11 per cent. Same percentage was used to estimate the rural population for the subsequent years. The number of persons below the poverty line in Andhra Pradesh would be somewhere in the range of 8.89 to 18.84 million. As per the Government of Andhra Pradesh estimates, the poor in rural Andhra were 12.09 million. There has been a decline (15 percent) in the total head count of poor after 2000 as per GOAP estimates. Table 10: Trend in Poverty in Rural Areas in Andhra Pradesh (in million)

Year Total Population

Rural Population

Rural Poor(Using

Rural Poor (Using 27%

Rural Poor(Using 33%

15.9%poverty

Ratio)

povertyratio)

PovertyRatio)

1991 66.51 48.62 7.73 13.13 16.051993-94 69.94 51.17 8.13 13.82 16.891995-96 72.15 52.75 8.39 14.24 17.411996-97 73.03 53.39 8.41 14.42 17.621997-98 73.85 53.99 8.59 14.58 17.821998-99 74.69 54.60 8.68 14.74 18.021999-2000 75.56 55.24 8.78 11.92 18.232000-2001 76.43 55.81 8.89 12.09 18.44Source: Population figures – Andhra Pradesh Government Statistical Abstract 1999. Rural Poor by Age Groups and Families Age-specific poor population using Deaton estimates is given in Table 11. The family size has been assumed at 5. The number of rural poor has increased in nineties. A significant proportion of the poor belong to the working class (15-59 age group). Moreover, 40 percent of the poor belong to 20-35 age group, indicating low employment for these category. The other important fact is that around 10 percent of poor are in the old age group, and these are likely to be more economically vulnerable.




Table 11. Rural Poor by Age-Groups and Rural Poor Families (Using Poverty Ratio of 33%) (in million)

Year 15-59 20-35 age 60+ age No.of Poor group Group Families 1991 9.01 3.78 1.22 3.21 1993-94 9.41 3.98 1.28 3.37 1995-96 9.77 4.10 1.32 3.48 1996-97 9.89 4.16 1.34 3.52 1997-98 10.00 4.20 1.35 3.56 1998-99 10.12 4.25 1.37 3.60 1999-2000 10.23 4.29 1.38 3.65 2000-2001 10.35 4.35 1.39 3.69

Source: Deaton A. 2.4 EMPLOYMENT AND UNEMPLOYMENT SCENARIO Work participation rate is higher for both rural and urban Andhra Pradesh in comparison to All India figures. (Table 12). The employment in Andhra Pradesh is mostly in unorganized sector (94%) and also there is a high incidence of child labour in the state (Dev and Mahajan, 2001). Table 12.Work Participation Rates: A.P. and All India Year Andhra Pradesh All India Rural Urban Rural Urban1983 1987-88 1993-94 1999-2000

53.5 53.3 57.6 54.2

34.835.837.634.8

44.543.444.441.7

34.033.734.733.7

Source: Dev and Mahajan, 20016 The growth rate of employment in both rural and urban Andhra Pradesh has not only declined but is lower than the All India figures for the period 1993-94 to 2000. This means the scope of employment is declining in the state in the recent past, which has direct impact on the poverty levels as working class is mostly engaged in the unroganised sector. Table 13: Employment Growth (per cent per annum): A.P. and All India Period Rural Urban

A.P. All India A.P. All India

1983 to 93-94 2.40 1.73 4.28 3.34

1993-94 to 1999-2000 0.29 0.67 0.01 1.34

Source: Dev and Mahajan, 2001

6 Mahendra Dev, S. and Mahajan, Vijay, (2001) “ Employment and Unemployment in Andhra Pradesh”, Paper for Andhra Pradesh Development Report




The upshot of low growth in employment is increase in unemployment rates in rural areas for both males and females using current daily status. Moreover, the unemployment rates in Andhra Pradesh are higher than average All-India figures. Figures for male unemployment in urban Andhra Pradesh are slightly lower compared to rural AP, but higher as compared to All-India figures. Table 14: Current daily status7 unemployment rates in A.P and India A.P. India M F M F Rural 1983 7.9 10.5 7.5 9.01987-88 4.9 9.4 4.6 6.71993-94 5.9 7.0 5.6 5.61999-‘00 8.8 8.7 7.2 7.0 Urban 1983 9.4 12.1 9.2 11.01987-88 10.1 13.2 8.8 12.01993-94 7.5 9.5 6.7 10.41999-‘00 7.7 9.7 7.3 9.4Source: Dev and Mahajan, 2001

2.4.1 Sectoral Distribution of Workers It is evident from Table 15 that workers in rural Andhra Pradesh are still dependent on the primary sector for their livelihoods with almost a constant share of 79 percent in the last two decades. On the other hand at All India level, there has been decline on the dependency on the primary sector and simultaneous increase in both secondary and tertiary sectors. This signifies the rural economy in Andhra Pradesh is stagnant with low labour absorption in other sectors. Table 15: Broad Sectoral Distribution of Workers in Rural A.P. and India Year Rural A.P. Rural all India Primary Secondary Tertiary Primary Secondary Tertiary 1983 1987-88 1993-94 1999-00

79.776.779.078.8

9.811.2

9.58.6

11.912.111.512.6

81.578.378.276.1

9.011.310.211.3

9.4 10.3 11.5 12.5

Source: NSS Rounds 2.5 SOCIAL INDICATORS The social indicators of Andhra Pradesh have significantly improved in the period between 1991 and 2001 as evident from Human Development Index value

7 In the Current Daily Status approach, the unit of classification is half day. Under this approach the person days are distributed by activity category during an average week.




(Table 16). The state has higher figure of gender disparity as compared to the All-India index with a consequent rank of 8 among 32 states, as of 1991. The sex ratio in Andhra Pradesh is however higher than the national average. Andhra Pradesh social indicator figures are below the national average as shown in the table below on several counts such as overall literacy rate, male and female literacy rate, access to safe drinking water and toilet facilities. On the other hand, Andhra Pradesh has better figures on health related indices. Table 16: Andhra Pradesh - Human Development Fact Sheet

Indices State India Human Development Index Value 2001 0.416 0.472Human Development Index Value 1991 0.377 0.381Gender Disparity Index Value 1991 0.801 0.676Gender Disparity Index Rank (out of 32) 8 Sex Ratio – 2001 978 933Sex Ratio Children 0-6 years – 2001 964 927Education Literacy Rate - 2001 (%) 61 65Male Literacy Rate - 2001 (%) 71 76Female Literacy Rate - 2001 (%) 51 54Rural Literacy Rate - 2001 (%) 55 59Rural Male Literacy Rate – 2001 (%) 66 71Rural Female Literacy Rate – 2001 (%) 44 47Urban Literacy Rate - 2001 (%) 76 80Urban Male Literacy Rate - 2001 (%) 83 86Urban Female Literacy Rate – 2001 (%) 69 73Gross Enrolment Ratio Class I-V (6-11 years),1999-2000 103 95Boys-Gross Enrolment Ratio Class I-V ( 6-11 years), 1999-2000

105 104

Girls -Gross Enrolment Ratio Class I-V ( 6-11 years), 1999-2000

101 85

Teacher-Pupil ratio (Primary School), 1999-2000 47 43Health Life Expectancy at Birth, 1992-96 (yrs.) 62 61Life Expectancy at Birth (Rural), 1992-96 (yrs.) 61 59Life Expectancy at Birth (Urban), 1992-96 (yrs.) 66 66Infant Mortality Rate – 2000 65 68Under 5 Mortality Rate – 1991 67 94Under 5 Mortality Rate - Male –1991 68 91Under 5 Mortality Rate – Female –1991 66 101Maternal Mortality Rate – 1998 (per 100,000 live births) 159 407Total Fertility Rate – 1998 2 3Percentage of houses with access to safe drinking water - 1991 55 62Percentage of houses with access to toilet facilities - 1997 35 49

Source : NHDR 2001 2.6 RURAL FINANCE ACCESS Access to formal credit in rural areas has been difficult, especially for poorer sections of the society, as enumerated before. Consequently the dependence on




the non-institutional sources is still prevalent in rural areas. This is true for the state of Andhra Pradesh as well. Some of the common findings of the World Bank-NCAER Survey (RFAS)8 on access to finance in rural areas covering two states, Andhra Pradesh and Uttar Pradesh with total sample of 6000 households, half in each state were the following:

• 70 percent of the rural poor do not have a bank account and 87 percent have no access to credit from a formal source.

• Informal sector lenders remain a strong presence in rural India, delivering finance to the poor on frequently extortionary terms.

• Access to other financial services such as savings accounts, life, health and crop insurance also remains limited for the rural poor.

The RFAS attributes the failure of India’s rural banks to deliver finance to the poor to a combination of factors.

• From the banks’ perspective, serving the rural poor is a high-risk, high-cost proposition, with high uncertainty, and transactions costs related to small loan size, frequent transactions and government policies which contribute to a financial climate not conducive to rural banking.

• From the poor rural borrower’s perspective, banks do not provide conveniently accessible and flexible products and services, high transactions costs including cumbersome, costly procedures, hefty bribes, and long processing times and poor borrowers can’t meet the demand for collateral.

It is therefore evident that the poor in the rural areas do not access to formal finance despite the presence of the scheduled commercial banks, regional rural banks and the co-operatives. The observations of RFAS on the “SHG Bank Linkage,” model were the following:

• The model has effectively targeted poorer segments of the rural population and helped reduce the vulnerability of its clients. Surveys indicate that nearly 54 percent of SHG members are from the poorest groups—landless and marginal farmers have access to finance.

• Recent analyses show that access for poor households to loans under SHG bank Linkage has improved asset position, increased savings, shifted borrowing patterns and activities financed, increased employment and consumption expenditure and had a positive impact on income, decreased poverty and had a beneficial social impact.

8 World Bank and NCEAR study, (2003) “Rural Finance Access Survey”




The SHG membership by type of households for Andhra Pradesh is given in Table17. The proportion of marginal landholding households that are members is the smallest, and one observes that around a third of small, medium, large and other households are members of SHGs. On the other hand, it is also clear that the majority (57 percent) of the SHG members belong to small and marginal category households implying SHG are catering to the financial needs of these households to a large extent. Table 17: SHG Membership in Andhra Pradesh by Type of Household

Marginal Small Medium Large Others TotalSHG member( percent households)

25.3 34.3 31.1 29 29.6 28.2

Percent of SHG members

43.3 14 11.4 11.4 19.9 100

Marginal = landholding less than 1 acre, Small = 1-2 acres, Medium = 2-4 acres, Large = more than 4 acres. Others includes households with or without land but involved in commercial activities. Source: RFAS-2003. Access to credit from formal and informal sources in Andhra Pradesh are given in Table 18. Although there has been increase in number of household indebted to informal sources, there has been decrease in share of total debt. The average debt per household was higher from informal sources in 1991 but is almost equal to formal sources in 2003. Table18: Access to Credit in Andhra`Pradesh by Source of Finance

Formal InformalPercent of households indebted AIDIS (1991) 16.5 21.8RFAS (2003) 24 32.6Percent share in total debt AIDIS (1991) 34 66RFAS (2003) 51 49Average debt per household (Rs) AIDIS (1991) 1692 3042RFAS (2003) 4313 4227

Source: RFAS-2003. Access to credit in AP was seen to be strongly related to land holdings. As land holding went up, larger proportions of people in higher category accessed formal credit, as they could provide the required security (Refer Table 19). Table 19: Access to Formal Credit in Andhra Pradesh by Land Holding

Marginal Small Medium Large Others TotalAP 11.8 33.8 41.9 56.3 20.7 24

Marginal = landholding less than 1 acre, Small = 1-2 acres, Medium = 2-4 acres, Large = more than 4 acres. Others includes households with or without land but involved in commercial activities. Source: RFAS-2003.




2.6.1 Access to Rural Finance through SHGs in AP Andhra Pradesh leads the SHG movement in India with almost 439,0009 SHGs covering approximately 54,00,000 women. Cumulatively, over 350,000 SHGs have been linked to banks under the linkage-banking program in Andhra Pradesh. As on March 2003, over Rs. 500 crores is outstanding with SHGs as loans from the banks. Some of the highlights of the SHG movement in Andhra Pradesh are:

• Of the 197,653 new SHGs financed by banks during 2001-02 in the country, 75,939 new SHGs were from Andhra Pradesh (38%).

• The cumulative number of SHGs financed by banks up to March 2002 was 461,478 of which 240,646 (52%) were from Andhra Pradesh.

• All the 41,413 SHGs provided with repeat finance by banks during 2001-02 were from Andhra Pradesh.

2.6.2 Trend of SHG-Bank Linkage in Andhra Pradesh The SHG Bank linkage program was started in 1992 as a pilot project to link 500 SHGs with Banks and upgraded to a regular banking program in 1996, and in AP has been expanding rapidly since 2000-01. In 2002-0310 alone, 1,23,548 SHGs accessed bank finance to the tune of Rs 339.61 crores. The SHG Bank linkage programme in AP increased by leaps and bounds, over the years, and the following table enumerates the progress of SHG-Bank linkage in AP. Table 20: Progress of SHG-Bank linkage in AP Year No of Groups Bank Finance*up to 1995-96 778 20.12 1996-97 434 14.07 1997-98 1,322 31.75 1998-99 6,579 127.46 1999-00 29,242 549.49 2000-01 84,939 1431.68 2001-02 1,17,352 2670.92 2002-03 1,23,548 3396.07 *amounts in INR million Source: ‘Status of SHG Federations in Andhra Pradesh’ Assessment Findings by APMAS 2.6.3 Institutional Support in Promotion of SHGs in AP The most important government program involving women in savings and credit is DWCRA. In Andhra Pradesh, almost Rs 500 crores was provided as revolving fund as against a saving of Rs 550 crores by the groups till March 2002. 9 Source: Status of SHG Federations In Andhra Pradesh - APMAS Assessment Findings, March 2003 10 As on March 22, 2003




Velugu Project, a large scale poverty reduction project funded by the World Bank, which is being implemented in more than 820 mandals11 out of the 1100 mandals of AP, along with other government departments and NGOs is engaged in strengthening the SHG movement. Velugu Project plans to promote and/or strengthen approximately 253,500 SHGs, 23,000 Village Organizations and 800 Mandal Level Federations over the next five years. Networking of SHGs and institution building are seen as key strategies for sustaining the SHG movement in AP. Government, Bankers and NGOs have been working together to enhance the quality of SHGs in the State. To further supplement the work of these and to maximise the impact, APMAS has been established as the first of its kind state level technical support institution for strengthening the SHG movement. 2.7 OUTREACH OF VARIOUS PROGRAMS IN ANDHRA PRADESH APMAS conducted a study on the outreach of various progams and funding organizations in Andhra Pradesh. The following were the highlights in the study: Government Programs: The largest government program which has a savings and credit component is DWCRA. Under the DWCRA scheme promoted by the government, groups can avail revolving fund ranging from Rs 15,000 to Rs 25,000 per group. In AP, Rs 150 Crores revolving fund was given to 1,00,000 groups covering 15 lakh women. Out of 4.28 lakh SHGs in AP as on September 2002, 1.90 lakh SHGs are covered under DWCRA with a membership of about 25 lakh women.12 Banks: Banks were encouraged by NABARD to finance SHGs when it issued policy guidelines in February 1992. Several training programs were conducted for bank managers to explain the concept of SHG and motivate them to lend. In AP, the banks have cumulatively financed Rs 340 Crores to 123,548 groups as on March 31, 2003. Apex Institutions: Apex financial institutions like RMK, SIDBI and HUDCO have extended credit especially to the NGOs who were credit worthy. They act as wholesalers and NGOs act as retailers. RMK operates in 19 states in the country and as on March 31, 1999, RMK had cumulatively sanctioned Rs 23.8 Crores to 110 NGOs in AP as against Rs 62.7 Crores to 386 NGOs in the country. 11 Administrative Unit below the district consisting of a group of Villages/Panchayats (in Andhra Pradesh blocks were sub-divided in to mandals but retained the administrative and local government functions of blocks). 12 ‘Andhra Pradesh Development’, Edited by Rao and Dev, Centre for Economic and Social Studies, Hyderabad, 2003




Coverage of Rural Poor Under Poverty Alleviation Schemes13: Outreach of the various poverty alleviation programs in AP is given below: • The rural poor under 15-59 age group have been considered for IRDP

because they belong to the working age group. The percentage of poor people covered under IRDP was very low at 1.26 per cent in 1995-96. It increased in 1996-97 but declined later. The percentage of poor covered under SGSY was 2.84 per cent.

• Under TRYSEM, the population under 18-35 age group is given training. The 20-35 age group has been taken, as proportions for 18-35 age group are not available. The coverage under TRYSEM was also very low. In 1996-97, 2.43% of the rural poor were covered, this number declined to 0.56% in 1998-99.

• The above 60 yrs population has been considered to examine coverage under the National Old Age Pensions. The coverage under NOAP seems to be substantial. It was around 35.58% in 1995-96. It increased significantly since 1996-97 and reached around 94 per cent in 1999-2000.

• The coverage under Development of Women and Children in Rural Areas (DWCRA) was less than 0.5% in 1995-96 and declined over time.

• The Coverage under National Family Benefit Scheme (NFBS) was also less than one per cent but showed fluctuations.

• The coverage under National Maternity Benefit Scheme (NMBS) was 3.5% per cent in 1999-2000, and it had come down from a high of 4.7% two years back.

2.8 GENDER ANALYSIS The key issues related to gender analysis are access of women to resources, education among the girl child, sex ratio, health indicators of girl child, adolescent girls and women. As indicated earlier, the SHG movement has given the opportunity to the women access to financial resources and consequently have been more empowered. This is true specifically for the state of Andhra Pradesh where the SHG movement is strong and visible. The economic benefit has flown to the poor and marginalised women in the rural areas. However other indicators such as girl literacy, their enrolment in schools, etc. are poor, indicating the low preference given to girl’s education in comparison to the boys in the state. The degree of discrimination is more pronounced in the rural areas. Even though there has been a significant increase in the literacy and enrolment levels of girls between 1981 and 1991, it is around 17 and 13 percent lower respectively compared to the boys (Refer table 21). Moreover, the overall 13 ‘Poverty Alleviation Programmes in Andhra Pradesh – An Assessment’, 2002, Planning Commission – Government of India




female literacy rate is lower than the national average in both rural and urban areas (Refer Table16). Andhra Pradesh also has better health indicators compared to the national average implying increased access to heath facilities by women. Table 21: Literacy and Enrolment Percentage of Girls vis-à-vis Boys in Andhra Pradesh (percentage) Literacy (Age 7-14 years) Enrolment in school (6-11

years) Boys Boys Girls Girls Boys Boys Girls Girls 1981 1991 1981 1991 1981 1991 1981 1991Andhra Pradesh

53.86 70.65 36.32 53.83 54.7 59.2 37.9 46.7

All-India 60.58 71.44 41.57 56.23 55.3 56.6 38.5 45.4Source: NHDR 2001 The significant but discomforting feature in Andhra Pradesh is high incidence of child labour in the state (double than national average), which is more in the rural areas than in urban places. This incidence of child labour has reduced but the drop can be attributed to decline in child labour among boys in rural areas. In fact, the percentage of girl child labour is higher than boys in 1991 indicating that girls are being pushed to such jobs. (Refer Table 22). This is probably a cause of low enrolment among girls in the state, especially in rural areas. Table No 22: Working Children in the Age Group 5-14 (percentage) 1981 1991 Boys Girls Boys Girls AP-Rural 17.4 15.7 11.4 13.6 AP-Urban 5.8 2.9 4.0 2.2 AP-Total 14.8 12.8 9.5 10.5 All-India-Rural 10.0 7.8 6.6 6.3 All-India-Urban 3.7 1.6 2.8 1.2 All-India –Total 8.6 6.4 5.6 2.7 Source: NHDR 2001 It is apparent that SHG movement in Andhra Pradesh has empowered the women with greater access to financial resources but thrust on development of girl child is still lacking in the state as evident from literacy and other indicators. 2.9 CONCLUSIONS AND RECOMMENDATIONS Even though, there are disparate claims to reduction of poverty in the State of Andhra Pradesh but it seems that there has been a decline in the same in the recent period, according to the GoAP estimates The poverty in the state is




primarily accounted by rural poverty, which is perhaps an outcome of lack of opening for the working class in sectors other than agriculture. This is evident from the high dependency of the population on agriculture. One of the significant factors contributing to reduction of poverty is the growth and penetration of the Self-Help Group (SHG) Movement in the state, as it has been forerunner of the SHG movement in the country. This is obvious from the number SHGs constituted and linked to the bank due to efforts from Government, NGOs as well as micro-finance institutions. The impact has been both economic empowerment and social recognition of the women in the state. Despite such a progress in poverty reduction, the state is lagging behind in literacy levels and access to basic amenities. Moreover, there is a high incidence of child labour in the state in comparison to All India figures, mostly in the rural areas. The key to further reduction of rural poverty in the state of Andhra Pradesh is creation of employment opportunities in sectors other than agriculture in the rural areas. Public and private initiatives should be geared towards growth in secondary and tertiary sector and thereby creating opportunities in the non-farm sector. The SHG movement needs to be sustained in the state and could be used as a mechanism to improve on other social indicators through innovative policies and programs. This will help in further reduction of gender disparity in the state.




References: APMAS, (2003) Status of SHG Federations in Andhra Pradesh - Assessment Findings Central Statistical Organization, Economic Survey, 2003-04, Jha, Raghbendra(2001) “Economic Reforms, Economic Growth and Anti-Poverty Strategy in India” IFAD Report Mahendra Dev, S. and Mahajan, Vijay, (2001) “Employment and Unemployment in Andhra Pradesh”, Paper for Andhra Pradesh Development Report National Sample Survey Organization, Report No. 422 Planning Commission – Government of India (2002), Poverty Alleviation Programmes in Andhra Pradesh – An Assessment Rao and Dev (2003), Andhra Pradesh Development, Centre for Economic and Social Studies, Hyderabad RBI Bulletin, (February 2000)-All India Debt and Investments Survey (1991-92) Sarvekshana, 2000, published by NSSO United Nation Development Report (2001), National Human Development Report. World Bank and NCEAR study, (2003) “Rural Finance Access Survey”



October 2005 Page 1

ANNEX 2: INITIAL ENVIRONMENTAL ANALYSIS

1. Introduction

The Rural Finance Sector Restructuring Project as proposed by ADB will include the RRBs in Andhra Pradesh.

The Initial Environmental Examination (IEE) presented herein has been prepared during the data collection and analysis phase of the Program preparation, to assess the potential environmental impacts of the identified subprojects.

2. Description of the Program

Subprojects will be financed through RRBs using credit provided by ADB under the Program for on lending by NABARD. A sample of typical subprojects that will take up credit have been identified. The subprojects identified are as follows:

Agro-Processing

• Cold Storage and Godown

Agricultural Production

• Short Term Agricultural Loans (including cash and inputs such as seeds, fertilizers and pesticides)

• Medium Term Agricultural Loans (3 to 9 years) for agriculture and ancillary activities like - Dry land development, Land development, Wasteland development - investment loans for pump sets, deepening of wells, digging of wells,

• Bio-agriculture / organic cultivation and Contract Agriculture under Agriculture Export Zone

• Aromatic and medicinal plant cultivation • Agri-clinic • plantation of horticulture crops ( mango, litchi etc) • cut flower cultivation, • Minor Irrigation (including sprinklers, drip irrigation) • Tractor and Bullock Cart

Livestock

• Animal Husbandry • Poultry Farm • Ornamental Fisheries



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Medium Term Non Farm Sector Loans

• Cottage industry and Artisans, handicrafts • Rural and other Housing • Term Loan and Working Capital facilities for large and small

industrial units • Small Vehicle, Tractor, Trolley, Matador, Tripper Lorry • Miscellaneous loans : Consumer Loan, Loan against Fixed

Deposits, NSC, Kisan Vikas Patra, Vehicle loans including commercial vehicles, Cash credit limit for traders, Education Loan

• Hotel, motel, restaurant loan • Clinic, Diagnostic Centre, Hospital Loan

Other Loans

• Small agricultural credits under the Swarn Jayanti Swarozgar Yojana (SGSY)

• Loans to Self Help Groups (SHGs)

3. Description of the Physical Environment

Andhra Pradesh is the fifth largest state in India. It covers an area of 2,75,045 sq. Km. Out of this 2,70,588.98 sq Km area is under rural and the balance 4,480.02 sq Km is urban area. It is also the biggest and most populous state in the south of India. Andhra Pradesh lies between 12o41' and 22o longitude and 77o and 84o40' latitude. It is bounded by Madhya Pradesh and Orissa in the north, the Bay of Bengal in the east, Tamil Nadu and Karnataka in the south and Maharashtra in the west.

Andhra Pradesh is divided into three zones. These are coastal plains, Eastern Ghats and the plains. Andhra Pradesh has 980 Km long coastline and a continental shelf of 3.30 million hectares. On the basis of the districts it is divided into three main regions. These are (1) Northern Circars or coastal Andhra comprising Srikakulam, Visakhapatnam, East Godavari, West Godavari, Krishna, Guntur, Ongole and Nellore districts; (2) Rayalaseema or Ceded districts comprising Kurnool, Cuddapah, Chittoor and Anantapur districts; and (3) Telangana comprising Khammam, Nalgonda, Warangal, Karimnagar, Medak, Nizamabad, Aadilabad, Mahbubnagar and Hyderabad districts.

The state is dotted with hill ranges from the north to the south, running erratically down the middle of the country dividing it into western and eastern or coastal Andhra. These hills form integral geographical entities of Andhra life and history. In the north, there are Simhachalam and



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Annavaram hills, in the middle country there are the Srisailam hill ranges and in the south are the Tirumalai-Tirupati hills.

The state has two major rivers, Godavari and Krishna, which spring from the Western Ghats in Maharashtra and flow eastward and joins the Bay of Bengal. The Godavari enters the state of Andhra Pradesh direct from Maharashtra, but the Krishna first goes to Karnataka where it flows for a considerable distance before entering Andhra Pradesh. Besides these two major rivers, there is Tungabhadra, Pennar and many other small rivers and rivulets. Pennar originates in the Karnataka plateau. Like all the peninsular rivers and even those, which arise in central India, like the Narmada, Sone and Chambal, all these are rain fed rivers. Andhra Pradesh has considerable topographical variations with dense forest in the north east, flat paddy lands in the coastal plains, several beaches along the Bay of Bengal and the stark boulder-strewn region around Hyderabad (capital city).

3.1 Temperature

Summers are very hot. The state faces heat waves when the temperature is unusually high. 2003 recorded, the highest number of heat wave days since 1986. In 2003, the heat wave developed in Telangana on May 16th, registered a maximum temperature of 46o C (5o C above the normal) at Nizamabad. By May 18th, the heat wave engulfed the South Coastal Andhra Pradesh and by May 20th covered the North Coastal districts. The heat wave also prevailed in Rayalseema from May 25th. The maximum temperature at many places in Coastal Andhra and Telangana ranged from 42o C to 47o C with 9o C above normal at Kakinada, Narsapur, Machilipatanam and Bapatla during May 20th to May 23rd.

3.2 Rainfall

Andhra Pradesh receives rainfall from the south-west monsoon as well as the north-east monsoon. The first begins in the second week of June and lasts till September while the second occurs in October-November. The state's coastal areas receive heavy rains during the north-east monsoon and are also subject to cyclonic conditions, which cause enormous damage to residential accommodation and to standing crops. The rainfall decreases from north to south. The Nizamabad district in Telangana receives about 87.5 cm of rain while Anantpur in Rayalaseema receives around 31 cm of rain.



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3.3 Land Use Andhra Pradesh is divided into three zones. These are coastal plains, Eastern Ghats and the plains. Andhra Pradesh has 980 Km long coastline and a continental shelf of 3.30 million hectares.

With most of the area being rural, farming is the major land use. Out of the 14.583 million hectares of arable land, only 4.123 million hectares has irrigation facilities and the rest 10.460 million hectares is used for dry land agriculture. Dry land agriculture provides 60 % of the total cereals, pulses and oil seeds.

In 2003 there were 3126 large and medium scale industries in the state. The mining sector included 1065 quarry and 245 mining leases.

Among the transport network, road transport is the largest, followed by railway and air. The total road length is 178747.00 Km. The total railway length is 5055 Km. There is one international airport at Hyderabad. Besides this there are national airports at Tirupati, Vishakapatnam, Vijaywada and Putaparathi. There are also 17 small airstrips.

3.4 Soil

There are six major soil groups present in Andhra Pradesh. These are red soils, black soils, alluvial soils, coastal sands, laterite and lateritic soils. Red soils, occupying about 65 percent of our land area, are formed from granites, gneisses and Dharwars as a result of variations in the mineralogical composition, relief and topography. Red soils are not so fertile but are present in almost all districts of our state. There are six sub-groups, namely red sandy soils (8 per cent), red earths with loamy sub-soils (30 per cent), red earths with clay subsoil (3 per cent), red loamy soils (9 per cent), deep red loamy soils (3 per cent) and red soils with clay base (12 per cent).

Black soils, which account for 25 per cent of the land area, are also formed from granites, gneisses and dharwars. These are moderately deep to very deep, calcareous as well as non-calcareous, fine and heavy in texture, neutral to strongly alkaline, generally poorly drained, and poor in nitrogen and phosphorous contents.

The alluvial soils are marine and riverine deposits occupying five per cent of our state area. These are very deep, medium to fine textured, neutral to alkaline and highly fertile soils. Actually, alluvial soils are formed where river deposition has taken place. These soils are found in the Krishna and Godavari delta areas. Coastal sands are formed from



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sandstones and quartzites and are deep, coarse (sandy) textures, neutral and have low fertility.

Laterite and lateritic soils which occupy one per cent of our state area, are deep to very deep, medium to fine textured, acidic, well drained but poor in fertility. Laterite soils are formed where there is a great amount of heat and humidity.

The constant, unabashed use of chemical fertilizers has left the soil in a totally bad shape. Soil degradation continues as natural way of soil enrichment has been pushed aside in keeping with the times calling for quick results. The salinity and alkalinity of soils has gone up. In fact the total salt affected area in our state is found to be 203 lakh hectares. Saline soils occur in large areas overlying the coastal sands in the coastal districts. Saline-alkali soils occur to an appreciable extent in the coastal districts and Anantapur and Kurnool districts of Rayalaseema and in many parts of Telangana districts. Non saline - alkali soils occur to a considerable extent in the districts of Nalgonda, Mahaboobnagar, Medak, Kurnool, Anantapur and also in parts of Nellore. In Telangana region, especially in Nalgonda and Mahaboobnagar districts, alkali soils have come to exist due to irrigation with poor quality waters, which are loaded with residual sodium carbonate.

3.5 Water Surface Water

The sources of surface water in Andhra Pradesh are rainfall and the water brought into the state through interstate rivers. As mentioned earlier there are two major rivers – Godavari and Krishna. Besides these there are 37 small rivers draining into the sea. As per the study conducted by Government of Andhra Pradesh, the total water available is estimated to be 77.75 BCM (2746 TMC), of which 49.63 BCM (1753 TMC) utilised. The balance available is only 28.12 BCM (993 TMC).

The state is divided into 40 river basins. Godavari River basin has about 21.53 BCM (760 TMC) surplus water, while other river basins have about 6.51 BCM (230 TMC). The water resources of Krishna and Pennar have been completely utilised.

Ground Water The net ground water content is estimated to be around 32203 MCM. Due to poor and erratic rainfall, there has been a pressure on ground water utilization. Indiscriminate tapping of ground water by too much drilling and construction of deep tube wells and bore wells, followed by unregulated pumping of wells have resulted in over exploitation and depletion of ground water resources in certain areas.



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Depletion of ground water resources has given rise to another problem “Fluorosis”. In some of the districts it has reached endemic proportion. This has affected number of people. For example in Nalgonda district about 70,000 villagers from 215 villages have been affected. Fluoride content in the ground water is known to vary from lowest during rainy season to being the highest during summer. On the basis of the spread of fluorosis together with its harmful effects, the best solution is to use surface running water for drinking purposes.



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4 Ecological Resources 4.1 Forests

Andhra Pradesh has 16.23 % of forest area, which cover 23.20 % of its total geographical area. The forest cover is divided into dense forest, open forest and scrub. Dense forest covers the maximum area (25827 ha) followed by open forest (18810 ha) and scrubs (9907 ha).

In spite of a gain of 408 sq. Km of forest cover in 2001 when compared to 1999, which occurred due to implementation of joint forest management programme, there is still lot of pressure on preservation of the forest area. The main reason for it has been free grazing and unscientific management of cattle population leading to overgrazing of forests, fragmentation of forest habitat leading to isolation, diversion of forestland for non forestry purposes, large man – made structure like dams leading to interference with discharge and free flow of water downstream, affecting salinity and coastal forest namely mangroves and annual ground fires affecting the biodiversity and regeneration of the forests.

In the coastal regions also, forests are dwindling. Concern has been expressed about the various schemes taken up to protect forest wealth through joint forest management. Deficiencies have been found in these schemes. Programmes that generate income (Cashew plantation) have received attention whereas mangroves have been neglected in spite of these being important.

Smuggling of timber from the forests both by timber merchants is also major cause of forest depletion. Moreover due to lack of alternative income opportunities, the local people have also resorted to illegal felling of trees.

Mining and sand and stone quarrying has also resulted in dwindling of forest cover. The forest officials have been unable to check, forest depletion due to these activities in spite of environmental laws in place to protect forests.

4.2 Biodiversity Andhra Pradesh with its varied topography from hilly regions of the Eastern Ghats, Nallamalais to the shores of Bay of Bengal, support varied vegetation, enriched by a variety of fauna. According to State of Environment, Andhra Pradesh report, in spite of the different programmes in place, these programmes have not been properly implemented. It has been pointed out that the local communities who live in harmony in the forest are being harassed in the name of protection of



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these areas and their economic activities are being restricted to a greater extent. Neglect of species has brought them to the brink of extinction. An example of it is the star tortoise. It was once abundant but due to the use of their meat in making local medicines their number has drastically dwindled. Steps have been taken to protect them. Currently they are mainly found in Venkateshwara Wildlife Sanctuary.

4.3 Soil and Water

Due to poor project implementation, there have been problems in soil and water conservation. A programme on Soil and Moisture Conservation (SMC) was implemented. It has not been successful. It has been alleged that money that was to be used for this programme has been used for other purposes. Even the work that has been completed is not of good quality. Check dams and rock-fills have been constructed in such a way that they hardly hold any water.

5 Economic Resources and Condition 5.1 Demographic features

The total population of Andhra Pradesh, according to 2001 census was 75.73 millions, which accounts for 7.4 % percent of India’s population. The percentage of urban population is approximately 27 %, which is almost on a par with the national average. Although the proportion of urban population as a whole has been increasing in the state, the rate at which it has grown has declined substantially in recent years. In case of the rural population the percentage has decreased from 82.6 % in 1961 to 72.9 % in 2001. This has been mainly due to movement of rural population to move to towns if any opportunity arose, mainly in terms of financial benefits.

5.2 Economic development

Andhra Pradesh, like most of the states in India, has a multi – structured economy, ranging from shifting cultivation in areas like Srikakulam district to high – tech industries in Hyderabad. Agriculture is the mainstay of the Andhra Pradesh economy.

Agriculture and allied sectors, which also include horticulture, animal husbandry and fisheries contributes close to 30 % of the state’s GDP and provides employment to 64.55 % of the population. Most of the people employed are from rural background.



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Andhra Pradesh was a late entrant into the country’s industrial scene. Growth of industries in the state was mainly propelled by public sector industry, especially in pharmaceuticals, electrical equipment, heavy engineering and machinery, iron and steel and fertilizers. Over the period of time private sector participation has increased, particularly since the last decade information technology has considerably contributed to the states economy.

In terms of income, there is a notable difference. A considerable number of people employed in agricultural and allied industries have a much lower level of income when compared to those in industrial sector like information and technology. This is in spite of the fact that agriculture and allied sector employs more than half of the employees.

5.3 Economic condition

The Human Development Index Value 2001 for Andhra Pradesh was 0.416 when compared to India’s 0.472. The percentage of person in labour force was 70 (1991 – 2000). The percentage of women in labour force was during the same period was 54 for the same period. The literacy rate was higher among males both in urban and rural population, which was 71 % and 66 % respectively when compared to females, which was 51 % (urban) and 44 % (rural).

6 Environmental Impact of Prospective Subprojects

Both short term environmental impacts of the subprojects proposed for funding to sub-borrowers by the Program, and the anticipated longer-term impacts of changes in employment and land use resulting from the dynamic process of rural change accelerated by Program activities, are summarised in this section. As the Program activities will contribute to an enhancement in income generation, particularly in agro processing, cottage industries, small scale trading and high value agricultural production, it is likely to have beneficial impact on the environment.

Intensification of crop and livestock production, coupled with increased efficiency of livestock production through increased use of stall feeding, will lessen marginal land degradation, livestock grazing on fragile lands and cropping of the most infertile and erosion prone soils. This could complement community and state efforts to protect and manage forest and grassland resources, resulting in a general increase in biomass production. This in turn will positively affect fodder, fuel and construction material availability. In addition, the ensuing improvement in quality of vegetative cover will reduce soil erosion and nutrient loss.

Notwithstanding the generally positive environmental prognosis, individual sub-loans provided for certain micro enterprises may occasion deleterious environmental impacts. Although less significant in magnitude, the cumulative




adverse impact of a large number of such undertakings could be highly significant. Therefore these will have to be mitigated and monitored by incorporating modest but effective measures into the Program design. Program implementers are expected to bear a major share of the burden of recognising negative impacts and ensuring the instituting and implementing of mitigation measures.

6.1 Agro-Processing

Loans are expected to be provided for cold storage and go-down for storage of seeds, agro-chemicals and agricultural products. Considering the nature of this business as well as the value of loans required, one can expect very few such loans to be extended through the project. As a result the possible environmental hazards, as listed below would have a very limited scale.

Impacts and Mitigation Cold Storage facilities would need refrigeration and air-conditioning equipment that would use electrical energy. There is a possibility that Ozone Depleting Substances (typically R-11 and R-12) may still be in use in air-conditioning equipment. In godowns and cold storages, in order to maintain hygienic condition for the storage of products, insecticide and pest control chemicals may be used. Fire hazards would be another area of concern. If chemicals are stored in the godowns, waste from breaking of packets and containers during unloading and handling will generate agro-chemical waste which should be disposed using best practices of safe disposal of agro-chemical waste. Further, care should be taken to protect workers from contaminated air inside storage facilities. Training should be provided on proper handling methods and these should be applied.

Assumptions and Risks It is assumed that the size of cold storage and godowns would be small to medium and no flammable substances (such as fuels, fuel wood etc.) would be stored. The design and construction of cold storages would consider fire and safety hazards at the design stage. In case of cold storage, the loan component would ensure that supply of electrical power and cost of electricity is included in the operating cost of the cold storage. Environmental Monitoring The specific indicators to be monitored are:

• Ensuring hygienic conditions at cold storage and prudent use of pest control as per guidelines, particularly temperature and humidity control;

• Checking the use of banned ODS gases as required under Ozone Depleting Substances (Regulation) Rules, 2000; and




• Energy use monitoring like routine check up of the efficiency

• Monitoring of the waste disposal (rotten perishable items).

6.2 Agricultural Production

Short and medium term agricultural loan facilities will be made available for agricultural production. Traditional crop cultivation as well as non-traditional horticulture and organic cultivation will increase, utilising loan facilities. Beneficiaries will use the loans for procuring seeds, fertilizers, pesticides, labour and water.

Impacts & mitigation The main environmental impact to be aware of is the irreversible loss of habitats. It is most critical when it is "wildland," but even degraded habitats, e.g., wetlands, perform valuable services. Such loss reduces economically valuable environmental services and accelerates extinctions and loss of wildlife. This loss can occur from two main causes: first, access roads that reach the project area; and second, clearing natural habitat for planting and processing of crops. Access roads leading into the project area or near habitat may facilitate unplanned settlements and destruction of that habitat.

Land development would require land clearing and poses the threat of decreasing the thin layer of fertile topsoil, exposing infertile subsoil, and accelerating erosion.

Increased agricultural production will impinge on the sustainable use of water and land resources. While improved water management could address the heavy demand on water, pressure on marginal lands and intensive cultivation of erosion-prone land may have to be addressed by environmental interventions and intensification of cropping.

The primary pollutants from pesticides are the active and inert ingredients, diluents, and any persistent degradation products. Pesticides and their degradation products may enter groundwater and surface water in solution, in emulsion, or bound to soils. Pesticides may, in some instances, cause impairments to the uses of surface waters and groundwater. Both the degradation and sorption characteristics of pesticides are highly variable. Some types of pesticides are resistant to degradation and may persist and/or accumulate in aquatic ecosystems. Pesticides may harm the environment by eliminating or reducing populations of desirable organisms, including endangered species.

Runoff of agricultural chemicals, including pesticide residues, to surface and groundwater bodies could result from agricultural production. The broad spectrum effect of certain pesticides can cause incidental damage to a wide array of fauna and flora. They are easily dissipated in air and through both surface and groundwater sources.




The potential direct negative environmental impacts of the use of groundwater supplies for irrigation arise from overtapping groundwater supplies (withdrawing water in excess of the rate of recharge). This results in the lowering of the water table, land subsidence, decreased water quality, and saltwater intrusion (in coastal areas). Salinity problems, naturally more acute in arid and semi-arid areas which have more rapid surface evaporation and saline soils, are exacerbated by irrigation. Waterlogging concentrates salts, drawn up from lower in the soil profile, in the plants' rooting zone. Salinity problems are not expected as drip and sprinkler irrigation is being proposed.

Environmental Interventions Explicit attention to improving farmer knowledge of water management, soil conservation, safe handling and use of pesticides, integrated pest management and complimentary use of organic fertilisers and pesticides will be required to mitigate adverse impacts from increased crop production. Co-ordination with existing Government extension services, and central and provincial environmental authorities, and enhancing the monitoring capacities of the RRBs are some of the actions which could minimise negative impacts on civil societies, community health and environment as a whole, during and after the Program. Participation of the RRBs in promotion of organic farming will benefit both the growers and consumers due to its environmental health benefits.

As a significant portion of the Program loans are expected to be availed by the farming community, coordination with Government extension services providing integrated pest management training will be a high priority. Design of training and monitoring programs will require the services of a local Environmental Impact Management consultant. The training program should focus on all farming activities utilising pesticides, and should consist of curricula, timing and training localities. Incorporating the environmental training into the Program training package will be desirable.

Assumptions and Risks It is assumed that appropriate soil conservation and water management will be practised on erosion prone lands used for high value crops. Another assumption is that Government training programs for IPM and organic fertilizer use will succeed in bringing out safe, economical, and low-impact use of agro-chemicals. However, there is always the risk that the RRBs and beneficiaries would ignore these factors, downgrade the importance of training and monitoring programs and fail to coordinate loans with environmental guidelines, leading to serious health hazards and severe localised adverse environmental impacts.

Environmental Monitoring The Program Implementation Unit (PIU) will monitor:




• the general level of awareness of key environmental issues among RRB staff through various capacity building programs.

The PIU will also monitor specific indicators such as:

• the number of relevant beneficiaries receiving IPM training; • knowledge of IPM among RRB staff and beneficiaries as

reflected in a simple attitudinal survey; • the number of beneficiaries receiving training in organic

fertilizers; and • annual field observation of selected sites where high value

crops are a part of the loan portfolio, to assess farmer knowledge of IPM techniques, overuse of pesticides and chemical fertilizers, and opportunities and constraints to increased use of organic compost.

• To check well development in drought prone areas for agricultural purposes

6.3 Livestock

Sub-loans are expected to be provided for purchase of poultry and finance animal husbandry.

Impacts Animal waste includes the fecal and urinary wastes of livestock and poultry; process water (such as from a milking parlor); and the feed, bedding, litter, and soil with which fecal and urinary matter and process water become intermixed. Manure and wastewater have the potential to contribute pollutants such as nutrients (e.g., nitrogen and phosphorus), organic matter, sediments, pathogens, heavy metals, hormones, antibiotics, and ammonia to the environment. Decomposing organic matter (i.e., animal waste) can reduce oxygen levels and cause fish kills. Solids deposited in waterbodies can accelerate eutrophication through the release of nutrients over extended periods of time. Contamination of groundwater can be a problem if runoff results from the misapplication or over application of manure to land or if storage structures are not built to minimize seepage. Because animal feed sometimes contains heavy metals (e.g., arsenic, copper, zinc), the possibility for harmful accumulations of metals on land where manure is improperly or over applied is possible. Pathogens in manure can cause diseases in humans if people come in contact with the manure. Pathogens in manure also create a food safety concern if manure is applied directly to crops at inappropriate times or if manure contaminates a product (e.g., food, milk). Air pollution is also a concern in relation to animal wastes. Farms on which animals are raised often concentrate odors associated with the microbial degradation of manure and other by-products of the production of meat, milk and eggs. There could also be biosecurity concerns requiring procedures to control the spread of animal diseases from one facility to another. Cattle and other




grazing animals can overgraze contributing to soil losses due to severe erosion, and impoverishment can change the vegetation composition and associated organisms in rangelands.

No significant adverse environmental impacts are envisaged from breeding and fattening of chicken, ducks or other small livestock. As the subloans for these activities are expected to be small, accumulation of unutilised manure is not expected, particularly as the demand for organic manure is increasing. Furthermore, insofar as loans improve household incomes, pressure of subsistence cultivation on marginal lands, especially in the dry zone, will decrease and household sanitation will improve. Periodic cleaning of pens will generate effluent with high Biochemical Oxygen Demand (BOD), which also could be used as manure.

In providing subloans for purchase of dairy cattle and buffalo, the lender should ensure that the beneficiaries take into account the fodder or forage availability and the negative impact of the pressure imparted on land and forests. Stall feeding would allow for better land management and efficient use of manure. Uses of manure are many including, but not limited to, fertilization of crops and biogas generation. Use of manure as fertilizer will be an incentive to organic farming while reducing soil degradation.

Ornamental fishery: The most obvious effect is the clearing of land and establishment of the ponds. This can be most destructive in coastal areas, such as in mangrove swamps and other wetlands which are particularly sensitive to disruption. Water management in the areas affected by fish ponds is crucial, as fish ponds can reduce the water supplies available for competing demands, such as for irrigation, domestic or industrial use. Traditional drinking water supplies and washing areas can be disturbed when streams are diverted to aquaculture ponds. Local groundwater can be depleted by withdrawals for ponds. In general, the establishment of aquaculture ponds which draw on scarce ground or surface water supplies, particularly in arid areas, should be avoided except where fish production can be integrated with other water use (e.g., reusing pond water for irrigation, cage culture, in irrigation canals). Pond drainage water can pollute nearby aquatic environments. The extent of pollution will depend on the quality of the pond water as well as characteristics of the receiving waters. The type and intensity of pond management - frequency of water exchange, inputs of fertilizer and chemicals – will determine the quality of water in the ponds. Pond water is almost always more nutrient-rich than surrounding waters, but will be more so if fertilizers and feeds have been added to the pond to increase fish productivity. Chemicals used in the ponds (i.e., for pond sterilization, weed, insect and disease control, water quality regulation, and control of undesirable fish) can also contaminate local waters. The quality of the receiving waters at the time of release from the ponds, and their dilution and dispersion capabilities will determine the effect of pond effluent on the nearby aquatic environment. Ponds often are stocked with larvae and juveniles captured




locally. This can deplete wild populations of fish, and erode capture fishery operations in the area. Other potential negative impacts of fish pond aquaculture arise from the use of exotics: negative impacts on the wild native species from the spread of disease and parasites by the exotic species or from escape of pond fish to the wild. Selective breeding also has a potential long-term impact by reducing genetic diversity within fish populations.

Environmental Interventions Monitoring fodder production and availability will assist in mitigating adverse impacts of large ruminants while no interventions are required for poultry. When action is taken to ensure that the sub-borrower or beneficiary has a good knowledge not only of animal husbandry and feed plans but also the risk of animal loss, the success rate of the subloans will be high. In areas where the demand for livestock loans are high, RRB functionaries will need to facilitate training utilising the existing extension services.

Assumptions and Risks It is assumed that prior to making available of livestock subloans, the lending institutions will ensure that beneficiaries have knowledge or obtain training on health and nutrition needs of the animals and sustainable extraction of fodder. A further assumption is that, as the demand for fodder increases, commercial production of fodder in community and private land will develop in the area. Nevertheless, there is a risk that feed availability will not be satisfactory and as fodder becomes a limiting factor of production pressure on public lands will increase.

Environmental Monitoring Indicators that need to monitored are:

• number of beneficiaries who have planted fodder crops and trees on their own land;

• increase in local fodder production; and • increase in organic farming and biogas production. • Using pre-existing water bodies for ornamental fish cultivation

and utilizing the natural productivity of the intact ecosystems (e.g., mangroves, salt grass marshes) instead of converting them to pond production.

• use of exotic varieties of ornamental fish

6.4 Medium Term Non Farm Sector Loans and Retail Trade and Business Enterprise Loans

Subloans are expected to be made available to small scale cottage industry, rural housing, investment and working capital loans for industrial units, loans for small hospitality services and medical services. In addition, there would be miscellaneous consumer loans including vehicle loans and educational loans.




Of the identified sub-projects, loans to industrial units, medical services and hospitality services can cause significant environmental impacts. Depending on the type of industry and its pollution potential, industries can cause a wide array of water, air, land and ecological impacts. Medical clinics (pathological labs, diagnostic centers, blood banks etc.) and hospitals pose medium or large scale bio-medical waste disposal risks and are mandated by Bio-Medical Waste (Management and Handling) Rules, 1998. Small hotels, motels and restaurants cause air and water pollution and require “consents” under the Water and Air Acts and Rules. Housing loans may lead to temporary impacts during construction from the use of water and dust emissions. If wood is used for housing construction, there could be a possibility of stress on local forestry. Maintenance and use of vehicles (Tractor, Trolley, Matador, Tripper Lorry, commercial vehicles) would cause air and water pollution as well as pose problems of hazardous waste such as used oils, discarded oil filters, spent batteries etc.

The wastes from maintenance and repair activities can include used oil, spent fluids, spent batteries, metal machining wastes, spent organic solvents, and tires. These wastes have the potential to be released to the environment if not handled properly, stored in secure areas with secondary containment, protected from exposure to weather, and properly disposed of. If released to the environment, the impact of these releases can be contamination of surface waters, groundwater, and soils, as well as toxic releases to the atmosphere. Groundwater pollution can also result from discharges of wastes to wells.

While loans to Cottage industry and Artisans, handicrafts are not expected to have large impacts, there could be localised impacts due to use of hazardous chemicals (solvents, paints, laquers, acids etc), emissions from the use of fuel and wastewater from washing and cleaning.

The short term credit structure does most of its lending in the agriculture and related sectors, and loans for the above projects are likely to be few. However small the number and extent of such loans, It is necessary for both the lender and the borrower to be aware of the hazards and to take remedial measures accordingly.

Environmental Interventions Loan applications for housing, cottage or other industry using high-value forests products should be assessed carefully to ensure sustainability of resource. Financial and technical feasibility can be expected to imply environmental sustainability. Environmental hazards from water based effluents, hazardous and bio-medical waste disposal, air emissions from industrial units, medical clinics and hospitals, will have to be mitigated by ensuring subloan requirements through loan conditions, that the waste is neutralised and disposed using best practises. Compliance to environmental laws should be considered a pre-requisite to disbursement of loans to these




sectors. By promotion of reuse of waste/byproducts through cleaner production technology the waste released to the environment could be minimised. Cleaner production promotion should be built into the environmental training of the Program and the monitoring plan should include occasional checks to monitor the disposal of effluent to the environment.

Assumptions and Risks The principal assumption here, is that extraction of high-value timber products and fuelwood will be done at sustainable levels only. A further assumption is that markets for faster growing forest products as some types of timber and fuelwood will supply requisite quantities. However, there is always the risk of over-exploitation of high-value forest products, particularly in housing and cottage industries. The risk of market inability to supply materials like timber, fuelwood and bamboo is slight in the longer term although short-term market sluggishness may occur. A further assumption is that the liquid waste will be treated and disposed as specified. This will be of prime importance when several of the effluent generating activities are located in close proximity.

Environmental Monitoring The specific indicators for monitoring are:

• Check Compliance to Water (Prevention And Control Of Pollution) Act, 1974, Air (Prevention And Control Of Pollution) Act, 1981, Hazardous Wastes (Management and Handling) Amendment Rules, 2003, Manufacture, Storage and Import of Hazardous Chemical Rules, 1989 for industrial units, hotels and restaurant establishments. In addition to this, for medical clinics, Bio-Medical Waste (Management and Handling) Rules, 1998 compliance may also be monitored

• shortage or high cost of fuel or other raw material; • emission of noxious effluents or smoke, liquid waste; and • depletion of the resource base.

6.5 Other Loans

Program loans are expected to be utilised for small service enterprises under the Swarn Jayanti Swarozgar Yojana (SGSY). Also lending will be done for miscellaneous purposes through Self Help Groups (SHGs).

Impacts Environmental impacts of the above enterprises will be minimal. However, insofar as subloan facilities improve household incomes, pressure on forested areas and cultivation on sensitive land is expected to be reduced.

Environmental Interventions and Monitoring Considering the scale of operations and the level of adverse impacts no environmental interventions or monitoring is required.




7. Findings and Recommendations

Considering the positive and negative impacts of the proposed subproject loans, the overall impact is expected to be positive. Most of the short term negative impacts identified could be mitigated by creating greater awareness on the possible environmental impacts of the activities in question. Other short-term adverse impacts could be addressed by implementing recommended mitigation and monitoring activities

Loans to industrial units, hospitals and hotels need focus with regard to their compliance to Indian Environmental laws and regulations. Typically, it should be sufficient to check if the loan beneficiary possesses the permits (consents) and authorizations mandated by the regulations. Detailed EIA is required for 29 categories of industries under the Indian laws and regulation for new projects and for modernization and expansion projects with value above INR 500 million. However, the project finance in question is not expected to result in such large interventions and hence would generally not require an EIA under Indian Environmental laws.

Considering the inadequacy of the current knowledge of beneficiaries and the farming community of the state as a whole regarding the use of pesticides, training programs and extension material on the basics of safe, economical and sustainable use of agrochemicals and IPM are an absolute necessity. High value and organic crop production should be supported by Program financing, and the borrowers should receive training on fundamentals of pesticide handling and use, IPM and use of organic fertilizers. Further benefits as arresting land degradation and conservation of marginal lands and forested areas may result if this training could be extended to include water and soil conservation and sustainable extraction of non-forest and forest products for fuel, fodder and woodcraft.

Development and delivery of training on the basics of waste and wastewater disposal and environmental pollution will also be required to minimise adverse impacts of micro-enterprises funded by the Program

Institutional capacities of the RRBs will have to be improved to include staff for acquiring capability to screen the potential subprojects using the environmental guidelines provided and evaluate potential environmental impacts and identify mitigation for approved subprojects as part of the credit approving process. Environmental interventions of the RRBs will be have to be limited to deciding on the environmental feasibility of the subprojects by simply referring to the subloan Risk Categories, provided in the Environmental Guidelines.

A monitoring program developed during the preparatory phase of the project will be implemented by outsourcing the periodical and ‘as required’ environmental monitoring. After the Program period, monitoring of




environmental impacts and mitigation will be continued with funds from the Apex and inputs from central and local environmental authorities

8 Conclusions

This IEE has listed all potential impacts of the Program funding activities of the RRBs. No significant adverse environmental impacts that require detailed EIA were identified. Thus, the IEE represents the complete environmental assessment of the Program funding activities.

The RRBs should use the environmental guidelines annexed to this document to determine whether the subprojects are acceptable and they could further use the guidelines to decide on the required mitigation measures and monitoring.




Attachment – Initial Environmental Guidelines These Guidelines focus on a categorization of projects funded through sub loans into four environmental impact categories , I ( lowest impact ) to IV (highest impact) and outline actions for mitigation of potential adverse environmental impacts . The Categories are : I. Permit after informing borrower that due care is to be taken and

progress is to be monitored

RRBs to communicate the mitigation and montoring measures needed for the specific sub-projects as mentioned above to the beneficiary. II. Permit after informing due care to be taken, initiate capacity

strengthening so that due care is taken and monitor

RRBs to co-ordinate group training on mitigation measures and initiate periodic survey on the sub-projects to evaluate the implementation of mitigation measures III. Permit only after assuring due care will be taken

RRBs to communicate the mitigation and monitoring measures needed for the specific sub-projects and assess the beneficiary’s capability, both financial and practical knowledge, in implementing them and in monitoring any residual adverse impacts. Regulatory compliance check (consents, permits, authorizations from pollution control board) should be a part of this assessment. IV. Permit only after due care is taken

Due to inherent complexities and/ or characteristics, subprojects on this list have the potential to cause significant environmental impact. They require detailed environmental appraisal by competent environmental staff. The RRBs will have to consider these subprojects only after appraisal, if needed, by outside assistance. Note : Notwithstanding the level of impact, the subloan processing institution would have to seek professional advice if the institution does not possess the capacity to assess the cumulative impact of a concentration of these subprojects in a limited or sensitive area.




Initial Categorization Of Sub Projects and Environmental Guidelines

Sub-project Project category (impact)

Mitigation Monitoring

Agro-Processing Cold Storage and Godown I Use of non-ODS refrigerant gases

Fire and electrical safety Training on safe handling and disposal of agro-chemicals

Consideration of climatic factors (temperature and humidity) in the design of the cold storages and godowns

Hygiene in the godowns for food storage

Energy use of refrigeration equipment Waste disposal and use of biomethanation

Agricultural Production Short Term Agricultural Loans (including cash and inputs such as seeds, Fertilizers Pesticides Medium Term Agricultural Loans (3 to 9 years) for agriculture and ancillary activities like –

II

II

II

II

II

Avoidance of ecologically sensitive areas and water stressed areas; Replacement of top-soil after land clearing

Farmer knowledge of sustainable Water management through planned irrigation

Avoiding sinking of wells in fast depleting aquifers and in areas with poor ground water quality Training on pesticide and chemical application and integrated pest management

Training and awareness of farmers

General level of awareness on the key environmental issues of RRB staff

No land of ecological / social importance is converted to agriculture / horticulture

The percentage of farmers who practice IPM and drip irrigation






Dry land development Land development Wasteland development Investment loans for pump sets Bio-agriculture/organic cultivation Cut flower cultivation Contract Agriculture under Agriculture Export Zone Automatic and medicinal plant Agri-clinic Minor Irrigation (including sprinklers, drip irrigation) Tractor and Bullock Cart

II

III I

II

II

III

III

II I I

Wells developed in drought prone areas

Quality of groundwater (Fluoride, nitrates and TDS)

Top soil eroded lands / moisture loss affected saline lands

Deepening of wells III Avoiding sinking of wells in fast depleting aquifers and in areas with poor ground water quality







Digging of wells III Avoiding sinking of wells in fast depleting aquifers and in areas with poor ground water quality


Livestock Animal Husbandry III Fodder availability

Use of manure as fertilizer and wastewater for agricultural use Beneficiaries knowledge on animal husbandry practices such as feed plants, risk of animal loss etc. Adequacy of water quality for livestock (salinity, fluoride, nitrates etc.)

Number of beneficiaries with fodder crops

availability of and access to natural fodder and forage, cultivated fodder, and imported feedstuffs (in stall fed animals)

number and type of animals

condition of the livestock (weight, presence of disease, other health indices)

changes in wildlife populations and habitat due to livestock production Data on bio-security concerns (spread of animal and poultry diseases in the area)

Poultry Farm I






Medium Term Non Farm Sector Loans, Retail Trade and Business Enterprise Loans

Knowledge of use of hazardous substances

Cottage industry and Artisans, handicrafts

I

Rural and other Housing I Non- use of high value forest products Term Loan and Working Capital facilities for large and small industrial units

III Compliance with environmental laws and regulations (see list above) Systems of adequate treatment and disposal of wastes Loans for textile, mineral processing, cement and metal industries need more focus on account of their pollution potential

Monitoring of effluent and emissions in conformance with laws

Small Vehicle, Tractor, Trolley, Matador, Tripper Lorry

II Ensuring the PUC certificates are accorded to these vehicles

Routine emission testing carried out

Miscellaneous loans : Consumer Loan, Loan against Fixed Deposits, NSC, Kisan Vikas Patra, Vehicle loans including commercial vehicles, Cash credit limit for traders, Education Loan

I

Hotel, motel, restaurant loan II Compliance with environmental laws and regulations Systems for sewerage and drainage exist in the facilities






Clinic, Diagnostic Centre, Hospital Loan

III Compliance with environmental laws and regulations

Other Loans Small agricultural credits under Swarn Jayanti Swarozgar Yojana (SGSY) and miscellaneous loans to Self Help Groups (SHGs)

I



October 2005 Page 1

ANNEX 3: RECOMMENDED HARDWARE SETUP FOR COMPUTERIZATION OF MIS AT RRBS

Hand Held Devices

Server

Client 2Client 1

Web Camera

Thumb Impression Scanner

Printer

Document Scanner

Proposed System Architecture for RRB Branch

Hand Held Devices

Server

Client 2Client 1

Web Camera

Thumb Impression Scanner

Printer

Document Scanner

Proposed System Architecture for RRB Branch

Branch 1Branch 2

Switch

Head Quarters

Proposed System Architecture for I.T. Network connecting RRB HO with Branches

Branch 1Branch 2

Switch

Head Quarters

Proposed System Architecture for I.T. Network connecting RRB HO with Branches



October 2005 Page 2

80,000 Not needed40,000 One PC only

Hand Held Device with Printer ( Two) 30,000 One onlyDocument Scanner (One) 3,000Printer ( 132 column ) 9,000

18,000Generator of 1 KVA capacity 18,000Modem for data transfer ( One ) 1,500Thumb Print Scanner with software ( One ) 3,000Web Camera with driver software ( One ) 1,500

8,000 Not neededInstallation expenses at each location 10,000

222,0001,00,000 1,00,000

3,0009,000

Branch with less than 100 transactions per

day

020,00015,000

At H.O. or branch with over 100

transactions per day

Minimum configuration recommended :

One time cost of hardware

Server with 1GB RAM & 40 GB SCSI Hard Disk Drive ( One )Client / Terminals ( Two)

UPS system of 1 KVA capacity with 30 minutes backup (One) 18,00018,0001,5003,000

One time cost of software (includes customization & implementation)

1,5000

5,00094,000

Wireless LAN



October 2005 Page 1

ANNEX 4: FINANCIAL RESTRUCTURING AND MODEL PLAN

1. As – Is – Situation 1-1 Three of the 16 RRBs in AP have accumulated losses, all belonging to the SBI group. 1-2 Exhibit A presents a consolidated position of the balance sheet, profit and loss account and key indicators were the 16 RRBs to be consolidated into 3 as proposed in this project as of March 31, 2004. 1-3 The Syndicate Bank and Andhra Bank RRBs would show adequate capital adequacy while SBI (including SBH) RRBs would show lower capital adequacy than required by RBI under prudential norms for commercial banks and even lower profitability margins.

2. Required Adjustments 1-4 They key adjustments relate to provisioning for bad debts and possible reduction in operational costs due to the consolidation and improvement in efficiency driven by the TA support envisaged under the project. Exhibit B presents key indicators as of March 31, 2004 were these adjustment to be achieved as of that date in order to assess the adequacy of the proposed project plan. It may be seen that while in the case of Syndicate Bank and Andhra Bank RRBs, the increased provisioning is not fully offset by improved operational efficiencies, the capital adequacy situation remains positive. In the case of SBI RRB the profitability and capital adequacy indicators dip more sharply and additional funding is envisaged to shore up capital adequacy. In the next section a forecast of SBI consolidated RRBs is presented to model required changes in strategies to achieve a more viable operation. 1-5 Exhibit C presents the forecast and the underlying assumptions. 1-6 The project has proposed significant TA to achieve these efficiencies not only for the SBI consolidated RRB but also for the other two RRBs. 1-7 With these inputs (TA support and step up coupon bonds of Rs. 1,600 million as Tier II capital and cash grant: Rs. 250 million) the SBI RRBs are targeted to achieve benchmark profitability and capital adequacy levels in the medium term.



October 2005 Page 2

EXHIBIT A: CONSOLIDATED POSITION AS ON MARCH 31, 2004 Balance SheetYear Ended March 31, 2004 SBI RRB Group Syndicate RRB Group Andhra RRB Group

Sources of FundsPaid up Share Capital 90 40 30 Share Capital Deposits 1,032 540 66 Reserves 1,131 2,049 453 Provisions 473 258 98

NPA Provisions 461 251 98 Other Provisions 11 7 -

- - - Deposits Outstanding 24,800 19,203 3,832 Borrowings Outstanding 3,888 2,976 685 Interest Payable 2,811 88 27 Other Liabilities 1,276 930 117 Fresh Funding Tier II - - - Total Sources 35,027 25,825 5,211

Uses of FundsCash & Balances with RBI 1,839 1,047 251 Balances with Banks/Money at Call 7,039 2,638 456 Cash and Bank Balance 8,877 3,686 707 Investments 8,320 7,254 1,415 Net Advances 16,120 13,929 2,962 Interest Receivable 743 395 38 Fixed Assets 86 59 20 Other Assets 589 503 68 Accumulated Losses 292 - - Total Uses 35,027 25,825 5,211 NPA 1,807 1,807 1,807 NPA Provisions 461 251 98 Capital Adequacy 7.3% 13.1% 13.6%

Proforma P&L AccountYear Ended March 31, 2004 SBI RRB Group Syndicate RRB Group Andhra RRB Group

IncomeInterest on Advances 1,884 1,487 339 Interest on Deposits and Investments 1,284 723 168 Non-Fund Income 222 286 25

Total Income 3,390 2,496 532 Expenses - - -

Salary 721 473 107 Other Expenses 265 106 32 Provisions 93 21 13 Interest 1,883 1,245 310 Interest on Deposits 1,609 900 245 Interest on Borrowings 274 100 66

Total Expenses 2,962 1,844 463 Net Profit / (Loss) 428 652 69

Rs. Million



October 2005 Page 3

EXHIBIT B: CONSOLIDATED POSITION AS ON MARCH 31, 2004 WITH REQUIRED ADJUSTMENTS Balance SheetYear Ended March 31, 2004 SBI RRB Group Syndicate RRB Group Andhra RRB Group

Sources of FundsPaid up Share Capital 90 40 30 Share Capital Deposits 1,032 540 66 Reserves (including accumulated losses) 423 1,970 421 Deposits Outstanding 24,800 19,203 3,832 Borrowings Outstanding 2,260 2,976 685 Interest Payable 2,811 88 27 Other Liabilities 1,276 930 117 Fresh Funding (Tier II Capital) 1,627 - - Total Sources 34,319 25,747 5,179

Uses of FundsCash & Balances with RBI 1,865 1,058 254 Balances with Banks/Money at Call 7,039 2,638 456 Cash and Bank Balance 8,904 3,696 710 Investments 8,320 7,254 1,415 Net Advances 15,677 13,840 2,927 Interest Receivable 743 395 38 Fixed Assets 86 59 20 Other Assets 589 503 68 Total Uses 34,319 25,747 5,179 NPA 1,807 680 265 NPA Provisions 904 340 133 Capital Adequacy (post proposed Tier II Capital Infusion) 12.0% 12.7% 13.0%

Proforma P&L AccountYear Ended March 31, 2004 SBI RRB Group Syndicate RRB Group Andhra RRB Group

IncomeInterest on Advances 1,884 1,487 339 Interest on Deposits and Investments 1,284 723 168 Non-Fund Income 222 286 25

Total Income 3,390 2,496 532 Expenses - - -

Salary 721 473 107 Other Expenses 239 95 29 Provisions 535 109 48 Interest 1,883 1,245 310 Interest on Deposits 1,609 900 245 Interest on Borrowings 274 100 66

Total Expenses 3,378 1,923 494 Net Profit / (Loss) 12 574 37 Net Profit / (Loss) W/O additional provisioning 455 662 72

Rs. Million



October 2005 Page 4

EXHIBIT C: FORECASTS FOR SBI RRB GROUP RS. MILLION

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 AssumptionsShare Deposit into equity FY06 Growth rate of Advances (Net Advances + NPA Provisions) 20% 13% 15% 30% 30% 30% 25% 25% 20% 20% 20% 20%Growth rate of Deposits 13% 13% 15% 20% 20% 20% 20% 20% 20% 20% 20% 20%

Investments as a % of Deposits 18% 32% 34% 35% 30% 25% 25% 25% 25% 25% 25% 25% 25%SLR investments assumed at % deposits 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%Total Cash and Bank Balance as % of Deposits 60% 41% 36% 35% 30% 25% 20% 15% 10% 10.0% 10.0% 10.0% 10.0%Interest Receivable as % of Advances 4.8% 5.4% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%Yield on Net Advances 12.5% 12.4% 12.0% 11.5% 11.0% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%Occurrence of NPAs among fresh advances 5.0% 4.5% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%Provisioning Requirement for fresh NPAs 2.5% 2.3% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%Yield on Investments and Balances 9.0% 7.8% 7.5% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%Cost of Deposits 8.1% 6.9% 6.0% 5.5% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%Cost of Borrowings 8.3% 6.7% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Growth in Salary Cost 7.8% 6.8% 7.0% 20.0% 20.0% 20.0% 15.0% 15.0% 10.0% 10.0% 10.0% 10.0%HO Proportion of other expenses assumed at 30.0%Reduction in HO Expenses assumed at 33.3%Growth in Other Expenses 13.7% 120.1% 15.0% 10.0% 10.0% 10.0% 10.0% 10.0% 5.0% 5.0% 5.0% 5.0%

Increase in non-fund income -3% 54% 25% 30% 30% 30% 25% 25% 25% 25% 25% 25%

Amount of Step-up Coupon Bonds 1600Drawdown Profile 0% 50% 50% 0% 0% 0% 0% 0% 0% 0%Repayment Profile 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Opening Balance - - 800 1,600 1,600 1,600 1,600 1,600 1,600 1,600 Drawdown - 800 800 - - - - - - - Repayment - - - - - - - - - - Closing Balance - 800 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 Average Balance - 400 1,200 1,600 1,600 1,600 1,600 1,600 1,600 1,600

Rate of Interest on Step-up Coupon Bonds 0.0% 0.0% 0.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

Recovery of Existing Advances 20% 20% 20% 20% 15%

Enhancing provisions on existing advancesAdvances (including NPA Provisions) 12,291 14,699 16,581 NPA 1,692 1,837 1,807 Required Provisioning % NPA 50.00% 50.00% Total Provision Required 918 904 Provision Already Made 464 461 Additonal Provision Required and Phasing Thereof 4 442 111 111 111 111

Recovery of Existing NPAs 10% 10% 10% 10% 10%

Technology InvestmentOne-time investment 250 100.00 150.00 - - - - - - - Recurring 100 100 100 150 150 175Depreciation 100%Cash Grant 250 100.00 150.00 - - - - - - -



October 2005 Page 5

Year Ending March 31 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Balance SheetSources of FundsPaid up Share Capital 90 90 90 90 1,122 1,122 1,122 1,122 1,122 1,122 1,122 1,122 1,122 Share Capital Deposits 993 1,032 1,032 1,032 - - - - - - - - - Reserves 611 813 1,131 1,131 1,131 1,131 1,131 1,131 1,131 1,131 1,131 1,131 1,131 Provisions 462 479 473 618 1,062 1,685 2,567 3,707 4,998 6,551 8,418 10,662 13,358 Fund Requirement 33,304 38,237 44,081 54,343 65,086 77,784 93,562 112,299 134,408 160,546 Deposits Outstanding 19,409 21,875 24,800 28,519 34,223 41,068 49,282 59,138 70,965 85,159 102,190 122,628 147,154 Borrowings Outstanding 3,983 4,243 3,888 4,785 4,014 3,013 5,062 5,948 6,819 8,404 10,109 11,780 13,392 Interest Payable 2,334 2,947 2,811 2,811 2,811 2,811 2,811 2,811 2,811 2,811 2,811 2,811 2,811 Other Liabilities 1,486 992 1,276 1,276 1,276 1,276 1,276 1,276 1,276 1,276 1,276 1,276 1,276 Tier II Capital (Step-up bonds) 800 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 Cash Grant 100 250 250 250 250 250 250 250 250 Accumulated Profits post FY03 311 681 1,185 1,783 2,422 3,393 4,807 6,728 9,374 12,935 Total Sources 29,349 32,456 35,488 40,562 47,209 55,128 66,872 79,392 94,353 113,099 135,623 162,623 195,017

Uses of FundsTotal Cash and Bank Balance 11,634 8,945 8,877 9,982 10,267 10,267 9,856 8,871 7,097 8,516 10,219 12,263 14,715 Investments 3,524 6,936 8,320 9,982 10,267 10,267 12,320 14,784 17,741 21,290 25,548 30,657 36,788 SLR Investments 6,200 7,130 8,556 10,267 12,320 14,784 17,741 21,290 25,548 30,657 36,788 Advances (including NPA Provisions) 12,291 14,699 16,581 19,068 24,788 32,225 41,892 52,365 65,456 78,548 94,257 113,109 135,730 Existing Advances 14,699 16,581 13,265 9,948 6,632 3,316 904 904 904 904 904 904 Fresh Advances - 5,803 14,840 25,592 38,576 51,461 64,553 77,644 93,354 112,205 134,827 Interest Receivable 588 787 743 854 1,111 1,444 1,877 2,347 2,933 3,520 4,224 5,069 6,082 Fixed Assets 53 73 86 86 186 336 336 436 536 636 786 936 1,111 Other Assets 762 615 589 589 589 589 589 589 589 589 589 589 589 Accumulated Losses 493 402 292 - - - - - - - - - - Total Uses 29,344 32,456 35,488 40,562 47,209 55,128 66,872 79,392 94,353 113,099 135,623 162,623 195,017

Year Ending March 31 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Proforma P&L AccountIncomeInterest on Advances 1,447 1,636 1,884 2,013 2,353 2,906 3,575 4,503 5,584 6,774 8,076 9,639 11,513 Interest on Deposits and Investments 1,424 1,404 1,284 1,394 1,417 1,437 1,495 1,604 1,697 1,913 2,295 2,754 3,305 Non-Fund Income 148 144 222 278 361 470 611 763 954 1,192 1,491 1,863 2,329 Total Income 3,019 3,184 3,390 3,684 4,131 4,813 5,680 6,870 8,235 9,879 11,862 14,256 17,147 ExpensesSalary 627 675 721 771 926 1,111 1,333 1,533 1,763 1,939 2,133 2,346 2,581 Other Expenses 106 121 265 305 302 332 366 402 442 465 488 512 538 Provisions 75 73 93 145 445 622 882 1,140 1,291 1,553 1,867 2,244 2,697 Interest on Deposits 1,962 1,679 1,609 1,600 1,725 1,882 2,259 2,710 3,253 3,903 4,684 5,620 6,745 Interest on Borrowings 343 274 260 264 211 242 330 383 457 555 657 755 Interest on Step-up bonds - - - - 16 32 48 64 80 96 Depreciation on IT Investment 100 150 - 100 100 100 150 150 175 Total Expenses 2,770 2,890 2,962 3,081 3,762 4,309 5,082 6,232 7,264 8,464 9,941 11,610 13,586 Profit / (Loss) 249 293 428 603 370 504 599 638 971 1,415 1,921 2,646 3,561

Profit / (Loss) excluding additional provisioning 603 480 615 709 749 971 1,415 1,921 2,646 3,561



October 2005 Page 1

ANNEX 5: PROGRAMME FRAMEWORK

The Detailed Programme Framework is provided below.

Design Summary




GOAL Sustained rural economic growth and reduced rural poverty incidence in Andhra Pradesh

Reduced rural poverty incidence by 3% in Andhra Pradesh Maintained economic growth rate of 7% in Andhra Pradesh

Economic reform program assessment of Andhra Pradesh

Impact monitoring report Program completion report (PCR)

Program Performance Audit Report (PPAR)

PURPOSE Establish a sustainable rural finance system using the RRBs in the state through policy, legal, regulatory and institutional reforms

RRB restructured to operate as sustainable autonomous institutions Enhanced profitability of the RRB Greater availability of affordable rural financial services


Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) assessment reports

ADB review missions

PCR

Commitment of the Government of India and state government to pursue economic policy and agriculture reforms that enable RF institutions to operate autonomously within a liberalized financial policy regime

OUTPUTS I- 16 RRBs consolidated to 3 mainly through consolidation of RRBs under same Sponsor Bank

Management responsibility vested with respective Sponsor Bank Single Head Office for each of the 3 consolidated RRBs Branch rationalization for increased efficiency Assessment of changes required in business strategy and operations of the RRBs by respective Sponsor Banks



II- Improved legal framework for sustainable operations and increased autonomy and good governance for the RRBs

Certain key constraints imposed by the RRB Act to be addressed, initially through MoU between stakeholders and eventually through repeal/ amendments to the RRB Act and amendment of BR Act.





October 2005 Page 2

Design Summary




BoDs to be made more autonomous as well as accountable initially through agreement/ MoU between stakeholders and eventually through legislative change BoDs to be reconstituted to give sponsor bank a majority and to bring in required independence and expertise through induction of independent directors and RF experts. Improvement in role perception of Board members through training and sensitization programmes Audit and Risk Management committees set up Code of good governance adopted Internal control system set up in each RRB Computer based data management systems strengthened to facilitate off-site surveillance

III- Sustained institutional reforms Transformed RRBs to efficiently provide affordable rural financial services

Improved operating efficiency, loan collection, larger range of products and more efficient savings mobilization Increased outreach especially to target segment Improved HR practices, increased staff motivation Increased profitability Strategic use of technology


RBI, NABARD, RRB assessment reports


Institutional strengthening and improved governance will discourage politicization of RRBs Conducive local economic environment for operation of RRBs

ACTIVITIES Output I 16 RRBs consolidated into 3 mainly through consolidation of RRBs under same Sponsor Bank

MoU between GoI, GoS and the respective sponsor banks regarding vesting of management control of RRBs with Sponsor Banks Appointment of Implementing Agency

Program reports and reviews NABARD, Sponsor Bank and Implementing Agency assessment reports




October 2005 Page 3

Design Summary




110 Management responsibility vested with respective Sponsor Bank 120 All SBI sponsored RRBs merged in Step 1 130 All SBH sponsored RRBs merged with the amalgamated SBI RRB and all other Andhra RRBs merged under Andhra Bank or Syndicate Bank

140 Operational rationalization for increased efficiency

Setting up of special cells/ teams within RBI, NABARD, GoS, GoI, respective Sponsor Banks and RRBs to oversee/ execute the merger Merger of SBI sponsored RRBs in Andhra effected after due process. Deliberation upon lessons learnt during the merger process. Merger of other Andhra RRBs effected taking into cognizance lessons learnt from SBI experience Head Office consolidation to be effected – 3 HOs instead of 16 Exercise conducted to determine overlapping branches and branch rationalization plan developed Exercise conducted to determine changes required in business strategy and operations

Output II Improved legal framework for sustainable operations and increased autonomy and good governance for the RRBs 210 Constraints imposed by RRB Act to be addressed 220 BoD to be made more autonomous

Exercise conducted to identify constraints imposed by the RRB Act and BR Act on the ownership and restructuring of RRBs and on their operational autonomy and good governance. Workshop to determine best feasible course of action to deal with the constraints –e.g., whether RRB Act should be amended or repealed and what amendments should be made to BR Act MoU between GoI, GoS and Sponsor Banks to vest management control with Sponsor Banks and to lay out road map for repeal/ amendment of RRB Act and amendment of BR Act MoU to give Sponsor Banks autonomy in relation to, inter alia, Board composition, appointment and salary of Chair, overall salary structure, Board committees and remuneration of Directors and rule making BoDs to be reconstituted, more

Program reports and reviews NABARD, Sponsor Bank and Implementing Agency assessment reports


Institutional strengthening and improved governance will discourage politicization of RRBs The political will to allow this is critical to the success of the programme Conducive local economic environment for operation of RRBs would also influence the ability and willingness of the policymakers to take necessary steps



October 2005 Page 4

Design Summary




230 Constitution of Board Committees and establishment of code of good governance 240 Improved MIS to foster better internal control

Sponsor bank nominees in place of GoI, GoS, RBI and NABARD nominees so that Sponsor Bank has majority on the Board More Independent Directors, especially those with expertise in banking All directors to undergo training and role sensitization programmes so as to improve their role perception and make them more proactive Various Board Committees, including Audit and Risk Management Committees to be constituted and staffed appropriately Code of good governance to be adopted. NABARD, RBI to assist in formulation of the same Effective Internal control systems to be set up in each RRB and computer based data management systems to be used for off-site surveillance

Output III Sustained Institutional Reform 310 Improved operating efficiency 320 Improved loan collection 330 Larger range of products 340 More efficient savings mobilization and increased outreach 350 Staff motivation

Transaction/ operating costs as a percentage of working funds to be reduced by 30% Recovery performance to improve by 5-10 percentage points At least three new products catering to the needs of the rural poor/ target segment to be introduced Reduced number of branches but increased use of technology (including ATMs) Dedicated HR cell to be established to deal with HR issues and ensure increased employee motivation. Regular training and development to train and motivate staff. Special assignments with/ secondment to

Program reports and reviews NABARD, Sponsor Bank assessment reports


Continued good performance of RRBs is also dependent on the economic environment for operation of RRBs.



October 2005 Page 5

Design Summary




Sponsor Bank for willing staff members.

INPUTS Legal and Policy Reforms Institutional reforms Consolidation and Implementation Support Financial Restructuring Contingency TOTAL

Rs million

5

379

78

1600

203

2,265

=USD 50 million

Technical Assistance (TA) No. 4247-INDRural Finance Sector Restructuring and Development

Final Report Volume 2: RRBs - Annex 6

Amounts in Rupees ADB GoAP

RRBs/ Sponsor Banks

NABARD/ RBI Total

1 Policy and Legal Reform 5,220,000Workshops 900,000 900,000Short Term Consultants 4,320,000 4,320,000

2 Institutional reforms 379,215,000Role Sensitization 2,745,000 2,745,000Training 75,780,000 75,780,000Short Term Consultants 53,100,000 53,100,000Computerization 247,590,000 247,590,000

3 Consolidation and Implementation Support 77,736,000Implementation Team 8,928,000 1,440,000 31,104,000 2,304,000 43,776,000Dom & Intl support 32,760,000 32,760,000Communication 1,200,000 1,200,000

4 Financial Assistance 1,600,000,000 1,600,000,000

5 Contingency 202,732,000 202,732,000

Total project for RRBs 2,230,055,000 1,440,000 31,104,000 2,304,000 2,264,903,000In US$ terms US$ 49,557,000 US$ 32,000 US$ 691,200 US$ 51,200 US$ 50,331,000

Exchange Rate 45.00

October 2005 Page 1


Final Report Volume 2: RRBs - Annex 61 Policy and Legal Reform

1.1 WorkshopsWorkshops involving GoI, RBI, State Govt., NABARD, Sponsor Banks, RRBs, Legal ExpertsWorkshops to be organized in state capital/Mumbai/Delhi, approximately 20-25 participants in eachCost per workshop No. of workshops Total 150,000 6 900,000

900,000

1.2 Short Term ConsultantsFor legal and commercial inputs, and drafting support for agreements and norms Domestic Consultants Monthly Rate No. of manmonths TotalLegal Experts 300,000 2 600,000 Financial Experts 300,000 2 600,000 Total Fees 1,200,000 Out of Pocket Expenses 20% 240,000

1,440,000 For inputs in relation to regulatory policy and amendments in lawsDomestic Consultants Monthly Rate No. of manmonths TotalRegulatory/legal Experts 300,000 4 1,200,000

Financial Experts 300,000 4 1,200,000 Total Fees 2,400,000 Out of Pocket Expenses 20% 480,000

2,880,000

Total for Short Term Consultants 4,320,000

October 2005 Page 1


Final Report Volume 2: RRBs - Annex 62 Institutional Development

2.1 Role Sensitization for DirectorsNumber of RRBs(post consolidation) 3 Number of Board Members/ Senior Staff 20 Duration of training (days) 5

Board and Sr Mgt TotalRate People Days Amt Amt

Trainer (includimg Travel etc.) 25,000 2 15 750,000 750,000 Venue 5,000 15 75,000 75,000 Material/ Equipment 3,000 15 45,000 45,000 Travel 3,000 20 15 900,000 900,000 Food and Stay 3,000 20 15 900,000 900,000 Misc 5,000 15 75,000 75,000 Total R & R 2,745,000 2,745,000

Grand Total R&R 2,745,000

2.2 Training for Managerial and Frontline StaffProportion of Staff to be trained 60%Number of Trainees per Session 30

Managers FrontlineNumber of Trainees 1,000 4,500 Number of Days of Training 12 6

Managers Frontline Staff TotalRate People Days Amt Rate People Days Amt Amt

Trainer (includimg Travel etc.) 20,000 2 240 9,600,000 20,000 2 540 10,800,000 20,400,000 Venue 2,500 240 600,000 2,500 540 1,350,000 1,950,000 Material/ Equipment 3,000 240 720,000 3,000 540 1,620,000 2,340,000 Travel 1,500 600 5 4,320,000 1,500 2,700 2 9,720,000 14,040,000 Food and Stay 1,500 600 12 10,800,000 1,500 2,700 6 24,300,000 35,100,000 Misc 2,500 240 600,000 2,500 540 1,350,000 1,950,000 Total R & R 26,640,000 49,140,000 75,780,000 Grand Total Training 75,780,000

October 2005 Page 1


Final Report Volume 2: RRBs - Annex 62.3 Short Term Consultants

For designing training and role sensitization programme and implementing IT solutionsDomestic Consultants Monthly Rate No. of manmonths TotalInstitutional Development/ HR Experts 200,000 48 9,600,000 IT/ MIS Experts 300,000 48 14,400,000 Financial Experts 300,000 24 7,200,000 Gender Specialist 200,000 6 1,200,000 Environment specialists 200,000 6 1,200,000 Microfinace Specialists 200,000 6 1,200,000 Product Development Specialists 300,000 12 3,600,000 Total Fees 38,400,000 Out of Pocket Expenses 20% 7,680,000

46,080,000

International Consultants Monthly Rate No. of manmonths TotalProduct Development Specialists 900,000 6 5,400,000 Out of Pocket Expenses 30% 1,620,000

7,020,000 Total 53,100,000

2.4 Computerization

Number of RRBs (HOs) 3Proportion requiring additional investment 100%Basic Hardware 440,000 1,320,000Software 330,000 990,000Total Cost for RRB HO 2,310,000RRB Branches 1,168Proportion requiring additional investment 60%Basic Hardware 220,000 154,176,000Software 130,000 91,104,000Total Cost for RRB branches 245,280,000

Total Computerization Cost 247,590,000

October 2005 Page 2



3 Implementation

3.1 Implementation Team(a) External

Team Members Monthly salary/ fees No of people No. of months TotalProject Manager 150,000 1 24 3,600,000 Support Professionals 80,000 2 24 3,840,000 Total Fees 7,440,000 Out of Pocket Expenses 20% 1,488,000

8,928,000 (b) NABARD/ RBI/ Sponsor Banks

Team Members Monthly salary/ fees No of people No. of months TotalRBI 40,000 1 24 960,000 NABARD 40,000 1 24 960,000 Total Fees 1,920,000 Out of Pocket Expenses 20% 384,000

2,304,000 (c) RRBs/ Sponsor Banks

Team Members Monthly salary/ fees No of people No. of months TotalRRBs 25,000 32 24 19,200,000 Sponsor Banks 40,000 7 24 6,720,000 Total Fees 25,920,000 Out of Pocket Expenses 20% 5,184,000

31,104,000 (d) State Government

Team Members Monthly salary/ fees No of people No. of months TotalState Level 25,000 2 24 1,200,000 Out of Pocket Expenses 20% 240,000

1,440,000

Grand Total 43,776,000

October 2005 Page 1



3.2 Short Term Consultants

(a) International Consultants Monthly Rate No. of manmonths TotalImpact Assessment/ Review (including environment, gender, insurance, microfinance, cooperation)

900,000 4 3,600,000

Out of Pocket Expenses 30% 1,080,000 4,680,000

(b) Domestic Consultants Monthly Rate No. of manmonths TotalImpact Assessment/ Review (including environment, gender, insurance, microfinance, cooperation)

300,000 30 9,000,000

Fixed Asset Valuers/ Actuaries 300,000 24 7,200,000 Legal Advisors 300,000 24 7,200,000 Total Fees 23,400,000 Out of Pocket Expenses 20% 4,680,000

28,080,000

Grand Total 32,760,000

3.3 Communication to StakeholdersAnnual Budget No. of years Total

Lumpsum 300,000 4 1,200,000 1,200,000

October 2005 Page 2

1. Creating a Favourable Policy EnvironmentIssue of Policy Statement by GoI and GoAPMoU between GoI, GoAP, RBI, NABARD and Sponsor Banks

2. Improved Legal FrameworkIdentify changes required in legal frameworkIssue executive orders as interim measureAmendment to RRB ActAmendment to BR Act

3. Good Governance in RRBsReconstitution of Board of DirectorsCode of good governance is prepared in consultation with stakeholdersRole Sensitization of Board MembersInstitute various board level committees - Audit, Credit, ALM, NPA resolution

4. Adopt Effective RRB supervision and regulation mechanism

Create autinomous internal supervision cell in RRBsDevelop and implement state-of-art methodologies and systems for internal supervision of RRBsDevelop and implement manual and training to support internal prudential supervision of RRBsReview prudential norms for RRBs and institute changes in a phased mannerSupervision practices, tools and capability of NABARD to be strengthened and harmonized with RBI's practices in relation to commercial banksCodification of role of internal and external supervision

5. Carry out merger of AP RRBsMerge the SBI sponsored RRBs in APMerge the SBH sponsored RRBs in AP with the merged SBI RRB

Merge Indian Bank sponsored RRBs with Andhra Bank and Syndicate Bank sponsored RRBs

Q12

ADB

Q13 Q14Q1 Q2

IA

Planned Activity for year number2007 20082005

IMPLEMENTATION SCHEDULETechnical Assistance (TA) No. 4247-IND

Rural Finance Sector Restructuring and DevelopmenFinal Report Volume 2: RRB Project - Annex 7

Activity RBI

NABA

RDGo

IGo

APSp

. Ban

ks

Q3 Q4

2006

Q16Q9 Q10 Q11 Q15Q5 Q6 Q7 Q8

Q12

ADB

Q13 Q14Q1 Q2

IA

Planned Activity for year number2007 20082005

IMPLEMENTATION SCHEDULETechnical Assistance (TA) No. 4247-IND

Rural Finance Sector Restructuring and DevelopmenFinal Report Volume 2: RRB Project - Annex 7

Activity RBI

NABA

RDGo

IGo

APSp

. Ban

ks

Q3 Q4

2006

Q16Q9 Q10 Q11 Q15Q5 Q6 Q7 Q86. Sustained Institutional Reform

Detail and agree an institutional restructuring plan establishing clear milestonesDetail business plan for each merged entity including financial sustainability and outreach goalsProceed with implementation of business planDesign and implement internal reengineering planDevelop and implement training and recruitment plan for RRBs in context of new business plan Develop and implement a change management plan together with revised MIS and automation planSet up HR cellDesign job and position descriptions and recruit officersEvaluate training institute and facilities for delivering training to RRBs and prepare plan for supporting the institution including supplementation Work with training institute to identify training needs for RRB officers and Develop training programsDesign and implement a communication strategy for RRB customers and employeesDevelop local language communication material, especially for customersReview business processes in RRBs, improve accounting and MIS for RRBs in collaboration with RBI and NABARDElaborate and implement a computerisation plan for the RRBs

Set up separate supervision cell with appropriately trained staff, strengthen and implement internal supervision approach and methodologiesConduct a new technology study and pilots to test strategic use of technology in RRB business in order to increase effectiveness while decreasing costDesign new products to improve outreach especially to the poor and women while improving efficiencyIdentify and develop insurance and other risk mitigation products in collaboration with insurance service providers, commodity exchanges etc Negotiate terms for distribution of insurance and other risk mitigation products through the RRB network

7. ImplementationDevelopment of Selection Criteria for Implementing AgencySelection of Implementing Agency through 2-stage Competitive BiddingAppointment of Implementing AgencyMonitor, report progress to Steering Committee and assist in developing and implementing course corrections

rural finance sector restructuring and development - vol 2

Documents