Banks scurry to expand presence in non-urban areas

With the Reserve Bank of India expected to give banks a free hand to open branches and about a dozen non-banking finance companies (NBFCs) waiting in the wings to set up banking operations, existing banks are going the whole hog to expand their footprint.

The fact that most of the new bank licence aspirants are NBFCs with a strong presence in rural and semi-urban centres is likely to drive existing banks to these centres to get the first-mover advantage.

K. V. S. Manian, President – Consumer Banking, Kotak Mahindra Bank said “We had envisaged a growth rate (in number of branches) of 25 to 35 per cent per year ... With imminent entry of new banks we have enhanced this (target) to 30 to 40 per cent per year.”

The private sector banks are also rolling out rural branches faster than in the past, he added.

“The new rule to free branches of licences is a transparent and friction-free process, and I think this will help banks plan their network expansion better,” said Manian.

A State Bank of India spokesperson, who did not wish to be named, said this would lessen the time required for banks to open the branches. Normally, it takes the RBI a couple of weeks to respond to the application for licences and sometimes it goes through some iterations, he informed. SBI is the largest Indian bank and has about 15,000 branches.

It plans to add 1,200 branches this year.

That most of the growth these days is coming from rural areas must encourage banks to focus on this ignored segment, the industry believes.

The Reserve Bank of India and the Government too are going the whole hog to push banks to open as many branches as possible. The new governor at Mint Street made this clear the day he took charge.

Big Push

RBI Governor Raghuram Rajan said the central bank would soon throw open the doors for banks to set up as many branches as they desire, while telling them that they should adhere to opening at least one branch in a rural area for every four branches that they open in an urban set-up.

India has close to 90,000 bank branches, of all scheduled commercial banks put together.

Of this, a large number are in metro and urban areas. Though the rule that banks set up at least 25 per cent of the total branches in rural areas has existed for decades, not many banks have followed this diktat. This has lead to an uneven spread of banks.

“Notwithstanding the development of various types of banks, the Indian banking sector is yet to meet the desired banking penetration and inclusion as witnessed in most advanced and some of the emerging economies,” the RBI said in a report recently.

Based on data given in Basic Statistical Returns, it is estimated that rural India had only seven branches per 100,000 adults in 2011 in sharp contrast with most of the developed and even BRICS economies having over 40 branches.

Regionally, north-eastern, eastern and central regions are more excluded in terms of banking penetration, the RBI data showed.

According to a KPMG estimate, only 30,000 (or five per cent) of the 600,000 villages in India have a commercial bank branch.

The auditing firm said that 14.5 crore households in India have been excluded from banking, which it said was the “highest,” for any country.

THE INCONVENIENT TRUTH

Banks have been traditionally reluctant to open more branches in rural areas because the operating cost there is much more.

Also, not many officials prefer a rural stint.

How does one get people to operate their accounts? Financial education can possibly go a long way. The former Governor of the RBI, D. Subbarao, has said that banks must focus on communicating in local languages with the rural population.

Also, the shift to rural areas cannot blank out the fact that the current network of branches in urban centres, especially of public sector banks, is also grossly insufficient. Long queues and constant complaints of inefficient customer service is a case in the point.

Rajiv Takru, Financial Services Secretary, recently advised banks to use business correspondents as a stop-gap arrangement till they set up their own network in unbanked areas.

However, retaining the business correspondents has been a challenge for banks. Most of the business correspondents employed by public sector banks are graduates and earn between Rs 3,000 and Rs 5,000 per month. For them, it is a case of cost outweighing the benefits.

>satyanarayan.iyer@thehindu.co.in