Usha Thorat: Banking in the Hinterland
Keynote address by Ms Usha Thorat, Deputy Governor of the Reserve Bank of India, at the
Conference on "Banking in the Hinterland", organised by the Indian Banks Association and Rural
Marketing Agencies Association of India, Mumbai, 14 February 2007.
* * *
Ladies and Gentlemen,
It gives me great pleasure to be here this morning to share my thoughts on banking in the hinterland.
The theme of my talk today is that there is a huge business opportunity in banks going rural. Rural
banking has great potential if banks adopt appropriate approach and suitable strategies - scale up
their business levels, achieve capacity utilisation and devise innovative ways to cater to the typical
needs of the vast rural sector.
I will divide my address into three parts. In the first part, I shall describe the rural urban divide in
banking. In the second part, I will describe some changes that are happening in the rural sector.
Finally, I will try and elaborate on the kind of strategies that could be considered for banking in the
hinterland.
Part - I: The rural urban divide
Analyses of certain indicators of banking penetration of scheduled commercial banks in the country,
including RRBs, amply testify to the rural urban divide existing in their operations/business, as will be
seen from the following:
Average population per branch office (APPBO)
The average population served per branch office is an important indicator of banking penetration. The
trend in this indicator ever since the last decade is as under:
While the population per branch has decreased for urban areas, the same has increased for rural
areas indicating that branch expansion has not kept pace with the population increase in the rural
areas.
Number of accounts per 1000 population
The number of deposit (current plus savings) and credit accounts per thousand population is given
below:
It is seen that the deposits (current plus savings) accounts per 1000 population in the rural areas as a
whole, is about sixty per cent of the urban areas. North Eastern states, Orissa Bihar and Chattisgarh
have particularly low ratio. Similar position is generally evident even in terms of credit accounts per
1000 population. However, Southern states are relatively better off in this regard (Annex 1 and
Annex 2).
Number of accounts per branch
The number of deposit and credit accounts per branch in the rural areas is generally lower than the
position in urban areas as shown under:
Outstanding balances per branch
The deposits and credit outstanding per branch also reflect the rural urban divide.
It is seen that deposits per branch in the rural areas is far lower than that in the urban areas, notably
states in the North East , Northern and Western region. In terms of credit per branch also, the
difference is more pronounced in Northern and Western regions.
Outstanding balances per account
The outstanding balance per account, both deposit as well as credit, reveals the much larger values in
urban areas as evident from the following:
The average size of a deposit account in the rural areas is about one-third the size in urban areas and
ranged from about Rs.7000/-(in Andhra) to about Rs.17,000/- (in Punjab). The divide is as is to be
expected sharper in terms of credit per account. The average credit account in rural areas ranged from
Rs.19,000/-(in Tripura) to Rs.1.31 lakh (in Haryana).
Share of different credit agencies in the total cash dues of households
The share of different agencies in the total cash dues of rural and urban households reveals the extent
of penetration of formal financial sources.
This table clearly shows that the coverage of banks in the rural areas has fallen from 64 per cent to 57
per cent while, significantly, the share of money lenders has increased from 17.5 per cent to 29.6 per
cent in these areas.
Part - II: The rural sector - some interesting pointers
I would like to briefly dwell upon some facts, which bring home the potential of the rural sector:
•
The savings rate has increased to nearly 31 per cent in the recent period. Remittances from
urban to rural areas are becoming more significant as migration increases. The need for
banking facilities - savings, remittances and credit - has increased in rural areas.
•
The share of agriculture in GDP has fallen from 43 per cent in 1970s to 20 per cent currently;
within this, the share of food grains and cereals has declined from 31.7 per cent to 24.1 per
cent and that of commercial crops increased. Within the agricultural sector, the share of
fishing and livestock has gone up from 20.3 per cent to 29.3 per cent. Agriculture is getting
increasingly diversified as floriculture horticulture and other value added activities gain
importance.
•
The proportion of rural households, described as low income by National Council for Applied
Economic Research (NCAER), has gone down from two thirds in early 90s to 25 per cent
currently and those with middle income from one third to 70 per cent. This represents
increase of 50 million middle income households in rural areas.
•
Retail credit has grown in the last four years by nearly 50 per cent per annum mostly at
urban centres. As incomes increase, there is growing demand for retail credit in rural areas
that is perhaps being met by the informal sector. Anecdotal evidence suggests that
moneylenders in rural areas face more competition from other moneylenders rather than
from the banks.
• With the growing rural connectivity and tele-density, a host of non-farm activities are
mushrooming in the rural sector. Currently, the rural market accounts for 53 per cent of the
Fast Moving Consumption Goods (FMCG) and 59 per cent of the durable market in India.
The rural consumers represent more than 50 per cent of the country's 'consuming classes'.
Part - III: The way forward - some thoughts
Having discussed the rural urban divide in banking and the potential in rural banking, the question that
remains to be addressed is - how can banks meet the challenges of banking in the hinterland?
(i) To start with, I believe, fuller utilisation of existing capacity can itself give huge dividends.
Given the existing number of nearly 48,000 rural and semi-urban branches, an increase of
loans by rupees one crore per branch could imply additional profits of about Rs.480 crore to
the banking system.
(ii) Currently each rural branch services only around 1000 loan accounts. If we assume that a
bank branch can serve at least 3000 households, it would imply at the minimum tripling of
the business at rural branches This might require redeployment and some increase in staff,
especially field staff, and would be more than worth the effort considering the increase in
business and profitability that it would result in.
(iii) Banks would need to decide the kind of delivery channels required for meeting the banking
and remittance needs of the rural population. Today the branch is not the only way of
delivering banking services. All options such as mobile and satellite offices, rural ATMs,
smart card and mobile phone based banking, use of intermediaries including SHGs,
including post offices need to be explored for penetrating into the rural markets. Several
banks have tie-up arrangements with corporates engaged in contract farming. IT solutions
can take banking to the remotest corner and cut costs apart from providing valuable
databases for furthering business strategies. Whatever be the mode of penetration, it is clear
that unless there are well thought out strategies for marketing banking services in the
hinterland, banks will be missing emerging opportunities. As mentioned earlier 50 million
households in rural areas have moved from low income to high income giving rise to equal
number of potentially bankable households. To look at the scope for branch banking and
provision of banking services through other delivery channels in rural areas, banks can make
use of the research already available on the monthly per capita expenditure centre-wise and
district-wise, corroborated by data on consumption patterns for FMCG and mobile phones as
also other indicators of expenditure patterns.
(iv) Banks need to have appropriate strategies for rural banking. Rural clientele need savings,
remittances, loan and insurance products. When banks think of agricultural credit they
generally think of crop loans especially, food crops. The needs of agriculture are, however,
getting diversified and the required scale of finance is increasing. There is much more
demand for allied activities such as dairy, fishing and livestock, cash crops, besides ancillary
activities such as sorting, grading, processing, packaging and transporting to final
destinations and markets. Other service sector activities that spin-off the main activities are
also growing. This is giving rise to additional credit demand from a variety of new
enterprises, besides demand for retail and consumer credit. Are banks geared for the
surging credit demand in the rural areas in all sector, particularly allied agriculture and
services sector?
The strategies of banks will need to focus on the following:
o Developing products
A uniform banking/financial product for the entire country would obviously not work. Products
need to be designed and packaged taking into account local culture, customs, language,
literacy and social indicators. Also, rural households need to be provided credit in a
composite way covering all their needs, including life-cycle needs; the traditional crop loans,
term loans, housing loans, consumption loans bouquet may not work. Regional offices of
banks may need to be delegated with appropriate powers for product design, while ensuring
consistency with Board policies. Banks need to look at the overall cash flow of rural
households and fix general credit limits, which could be scaled up depending on
new/additional activities taken up.
o Creating awareness and brand building
Banks need to consciously evolve strategies for financial education in the rural areas.
Products developed for the region will need to be actively marketed in a responsible and
effective manner, with top priority at all times being accorded to transparency, customer
education and satisfaction.
o Having the right staff for marketing products
In rural lending there is an imperative need for the marketing staff to be knowledgeable
about agricultural practices and operations, besides being well acquainted with the features
of the products and their suitability to the targeted category of customer. In a sense,
providing financial services will also involve providing extension services as a risk mitigant.
Hence, banks will need proactive technical officers who can not only provide such services,
but also train their field staff. Another very important requirement is relationship management
in terms of face-to-face familiarity and continuity of contact. Surely, it is not without reason
that the rural folk are comfortable with persons like the postmen and even the local
moneylender, with whom they have occasion to regularly interact. Banks would do well to
address this need for building up a relationship and rapport with the rural clientele.
o Use of Information Technology (IT)
There are a variety of ways in which IT can be used by banks. Delivery of banking services
through IT based solutions, such as mobile phones and smart cards, while keeping costs
low, is one huge opportunity for increasing outreach afforded by modern technology that is
rapidly innovating. Other uses of IT are in credit risk management and pricing, which require
maintaining a comprehensive computerised data base - this can be used for a variety of
purposes, such as marketing, credit scoring, pricing, credit monitoring including rating
migration and devising appropriate internal control systems, etc. There is clearly a need to
have credit information companies across the entire country; the huge externalities
associated with having comprehensive credit records can be derived for more efficient
financial intermediation. With appropriate IT solutions in place and suitable field staff, banks
can also provide market insurance and capital market products for increasing their non
funded business.
o Developing and using risk mitigants
The three important risks identified in agricultural lending are yield risk (or input output risk),
calamity risk and price risk. Banks will need to aim at minimising these risks if they have to
deliver affordable credit to agriculture. Extension work, including proper advice on use of
fertiliser and pesticides, ensuring quality seeds and inputs are activities that minimise yield
risk. Enterprises providing such services would need to be supported by banks and actively
encouraged. Calamity risk minimisation involves insurance of crops and assets, including of
livestock/cattle and fisheries. While restructuring of loans can provide more time for
repayment, repeated rescheduling could lead to instalments ballooning beyond the
repayment capacity. Banks will have to evolve policies to address this issue while providing
vulnerable groups opportunities to engage in activities that supplement the household
income at times of natural calamities. Development of appropriately priced insurance
products is obviously a challenge especially id such insurance has to be affordable and
sustainable. Price risk in agriculture is inherent, having regard to the nature of agricultural
operations where supply cannot respond to prices immediately. Hence, price support policies
have been followed over the years. A more recent development is the futures markets, which
can provide opportunity to hedge risks. However, the players in these markets are mostly
traders and speculators. There is a need to find ways in which commodity markets can be
used to provide price support to farmers.
o Micro finance
A separate strategy for micro finance may have to be evolved, as this involves providing low
income families with access to banking. Invariably banks have found it advantageous to
partner with community based organisations and NGOs working in the area for
microfinance. Promoting SHGs, nurturing them and transforming them from micro-finance to micro
enterprise is something many banks are already engaged in. Banks could explore the
possibilities of working with the State governments by offering them efficient technology
solutions, such as smart cards for distribution of budgeted allocations for NREGP, pension
payments and various other social sector expenditures. As some of you may be aware, a
pilot project is under way in Andhra Pradesh (AP), where the AP government will tie up with
banks, who will offer smart cards to BPL families /pension recipients /NREGP workers for
disbursements of wages, pensions and other benefits. These smart cards can be operated at
village level through VOs - federated SHGs registered as cooperatives - that are eligible to
be used as business correspondents by banks. It is expected that as the SHG members get
used to the smart cards, there will be return flow of funds as they use their bank accounts for
savings. The cards could also be used as normal debit cards at merchant establishments.
o Regional Rural Banks (RRBs) as partners
One in every three rural/semi urban branch in the country is an RRB branch. Moreover, the
staff members of RRBs belong to the region and have knowledge of local language and
customs. These are significant strengths and need to be leveraged by sponsor banks, who
should view RRBs as their partners in rural banking. The initial costs for up scaling
technology and skills in the RRBs will be amply rewarded by the benefits that would accrue
in due course.
Conclusion
Competition in urban areas is squeezing bank margins. Even though agriculture contributes only 20
per cent of GDP, the rural population constitutes 70 per cent of population and as reported accounts
for 60 per cent of consumer durable market. This implies that there is an untapped business potential
for aggressive banking in the rural areas. The challenge lies in locating these areas and providing
them with the financial services through appropriate delivery channels and products. I am sure that the
banks with their extensive network of branches in the rural areas will be able to leverage their
presence and meet these challenges.
My thanks to the Indian Banks Association and Rural Marketing Agencies Association of India for
giving me this opportunity for delivering the keynote address at this conference. I am sure that the
day's deliberations will bring new insights to banking in the hinterland. I wish the conference every
success.
Thank you.
BIS Review 21/2007
BIS Review 21/2007