Rural banking turning into a profitable enterprise: Crisil

In a classic example of adversity turning into opportunity, rural banking, which till now was shunned by banks citing unfavourable economics, is gradually becoming a gainful pursuit.

“Increasing economies of scale (with higher business per branch) and usage of low-cost channels such as business correspondents (BCs) will help public sector lenders, who are currently incurring losses in their rural operations, to turn in profits over a five-year timeframe,” according to a report by Crisil Research. As for private banks, rural operations are mildly profitable already, generating a tenth of their overall returns, and the situation will get even better.

“In the last five years, business per branch in rural areas has grown at a compounded annual growth rate of 7 per cent, despite the overall branch network growing at 9 per cent annually. The economies of scale are set to increase further in the years to come.

“A case in point is the recently launched Pradhan Mantri Jan Dhan Yojana,” the report said.

While this poses challenges for banks in the short term, in the longer term, it would augment business per branch.

Banks are also bringing down operating expenditure and expanding rural reach by experimenting with smaller branches and increasingly using BCs. Going forward, more such models are expected to be adopted by leveraging technology.

Prasad Koparkar, Senior Director – Industry & Customised Research, Crisil Research, said, “Improvement in technology and favourable regulations have made it possible for banks to service their rural customers through business correspondents at about a fifteenth of the cost of a rural brick and mortar branch, which is about ₹100-110 per transaction. We expect 25-30 per cent of liability-side transactions in rural areas to be routed through BCs by 2018-19, up from 8-13 per cent currently.”

According to the report, rising scale and reduction in costs will drive down the opex ratio — or operating expenditure as a proportion of average funds deployed — of the rural branches of lenders, which is as high as 1.6-2 times that of non-rural branches, to 1.3-1.4 times by 2018-19.

Ajay Srinivasan, Director, Industry Research, Crisil Research, said, “We see the rural business of PSBs turning around by the end of 2018-19, with return on assets (RoAs) turning a positive 0.3-0.4 per cent because of lower operating expenses and better asset quality.”