Cracking the rural code

Rural markets have been a ‘no-go’ area for Indian banks, which are put off by the high cost of doing business there. But a few are beginning to get results.

Bank of Baroda (BoB) has seen a slow, but definite turnaround in the viability of small accounts, says Kishore Kharat, General Manager-Financial Inclusion. “It takes about three to six months for activity in these accounts to pick up,” he says.

BOB’s small accounts in rural areas today hold ₹2,350 crore. “After taking into account the statutory requirements in the form of SLR and CRR, we are left with about ₹1,800 crore for lending. At 6 per cent spread on lending, we are able to earn more than ₹100 crore on these accounts. Our cost would be about ₹40 crore and hence we make a net of ₹60-70 crore, which is good enough,” says Kharat. BoB’s peer Axis Bank has begun to manage costs better at rural branches to make them viable. “For instance, since customers in these branches go for simple products, we don’t invest too much in staff,” says Rajiv Anand, Group Executive Retail Banking, Axis Bank. “We ensure that break-even at rural branches is not very different from that in urban branches by efficiently managing costs,” he adds.

BoB has used the network of business correspondents (BC) to bring down costs. The bank’s rural branches now reach break-even within one or two years as against two to three years earlier. Data from Reserve Bank of India (RBI) shows that since 2010, transactions under the BC model has gone up sharply from 27 million to 250 million in 2013. BCs accounted for 82 per cent of the banking outlets in villages in 2012-13.

Challenges remain

Banks have, under regulatory demand, opened many rural branches in the past few years. Prime Minister Narendra Modi’s financial inclusion pet project – the Pradhan Mantri Jan Dhan Yojana (PMJDY) has also seen banks opening ‘no-frills’ accounts. Recent tally shows more than 10 crore accounts were opened under the scheme, which aims to open two accounts per household.

However opening of such accounts doesn’t guarantee financial inclusion. A recent CRISIL report said that business per rural branch was less than a fifth that of non-rural branches for public sector banks and almost a seventh for private banks. Reasons are many: small ticket size of loans, low fee income and higher provisioning for bad loans. For rural branches the banks’ opex ratio – operating expenses as a proportion of the average funds deployed –was 1.6 to 2 times that of non-rural branches, says the CRISIL report.

To generate revenues out of an account, banks will have to raise the deposit level. Between 2010 and 2013, banks have opened close to 110 million savings accounts, a growth of 35 per cent annually. But deposits in each of these accounts have only grown by 10 per cent.“ A bank has to spend ₹70 to ‘host’ an account per year.

To break-even it should have minimum balances of ₹3,000-4,000 per account,” says Bindu Ananth, CEO, IFMR Rural Channels and Services.The banks also need to provide a range of financial services, including credit, to ensure viability of these accounts. Like BoB, the rest too will have to depend on the BC model for this. The cost per transaction for rural branches, as per CRISIL Research estimates, was ₹100- 110 compared with ₹70-85 for non-rural branches.

The next step is to provide credit. However, a research paper titled “Cost of Delivering Rural Credit in India” by IFMR Finance Foundation says that for a public sector bank, the cost of providing credit through a rural branch is at 41.5 per cent of loans. And for a private bank it is 32 per cent. Though BCs lack the wherewithal --- requisite credit assessment systems -- to undertake lending activity, micro finance institutions (MFIs) have played a larger role in providing small-ticket loans to the weaker sections of the society.

They are cost-effective too. The report by IFMR Finance Foundation says that if banks were to provide rural credit through an AA rated MFI, the total cost would come to just 13.75 per cent of loans. Ideally banks will lend money to an MFI which will on-lend these funds to rural customers.

“Banks cannot go down to the last village to lend. While banks may not have the economics to make it work, other institutions do, says Anand Sahasranaman, Executive Director, IFMR Finance Foundation.