Rural Banking - Reaching the Remote Areas of India

Posted in Finance Articles, Total Reads: 1572 , Published on 03 October 2014

According to a survey by the Hong Kong based Political and Economic Risk Consultancy Ltd on Asian business and politics, India is the most over-regulated country in the world [1]. The banking, aviation and higher education sectors are highly regulated. The regulations in the survey were reported to be non-transparent and complex, while standards and certifications procedures are gruelling.

Image Courtesy:, Serge Bertasius Photography

The Indian banking industry is governed, monitored and regulated by the Reserve Bank of India. In spite of having around 50 banks in India and 57 rural banks [2] sponsored mostly by the PSUs, only three-fifth of the population of India has been catered to with the banking and financial services. Also, the INR 90 trillion banking industry of India generates a major portion of its value from the urban regions, whereas vast regions of potential rural economy lies untapped. With the objective to achieve greater financial inclusion, RBI has made it mandatory for every bank to open a quarter of their branches in rural and semi urban regions. Without these regulations banking services would never reach the poorest of the poor population of India residing in distant villages. Although the costing for setting up banks in villages is merely a small portion of that of the cost of setting up the bank in cities, this savings is offset by the low business volume per customer and much lower population density in the rural and semi urban areas. With a similar intent, banks were allowed to use Business Facilitators and Business Correspondents to reach the thinly dense rural India, who can provide almost all the basic banking services. RBI has also aided the introduction of ultra small branches across the nation, which are low on cost and have potential to scale up in the rural and semi urban region.

In February 2010, under the then finance minister, Mr. Pranab Mukherjee, the banking sector was opened for new private players and as many as 26 companies applied for the licenses (TATA Sons withdrew later). Companies like SREI Infrastructure Finance applied for the banking licences banking on their strong rural presence. Due to corporate pressure and high number of applicants, it took the RBI more than four years to finally announce the list of new banking licensees. It was extremely evident from the final shortlists that RBI wanted a conservative move given the importance of banking sector in any economy. RBI has also made it binding for new banks to open at least 25% of their branches in rural regions. They will also have to comply with the norms of priority sector lending. This obligates the newly formed banks to loan at least 40% of their money to segments such as agriculture, retail traders, professionals, small businesses and self-employed individuals. These steps clearly imply the concern of the regulator for the rural sector and the desire to ensure the financial inclusion of the rural India.

The two new entrants Bandhan Financial Services and Infrastructure Development Finance Company can capitalize on the untapped, under banked and the low credit penetrated rural population of India [3].

RBI has shown interest in providing a banking license to India Post subject to conditions. The major reason for the giving them the licence would be India Post’s strong rural present (as of 31st March 2011, it had 1,54,866 post offices, of which 1,39,040, i.e. 89% in rural areas). It offers several financial services including the Public Provident Fund, National Savings Certificates, savings-bank accounts and generates a major portion of its revenue from rural regions. Even if India Post is not converted into a commercial bank, it can collaborate with the existing banks and other financial institutions. This will lead to the complete utilization of assets and generation of extra revenue for India Post and provide an excellent penetration opportunity for current players. A similar model was successfully implemented by Brazil Post.

In its endeavour for a greater financial inclusion especially in the rural region, RBI has opened the door for applications for differentiated banking licenses. These licenses can be of different nature based on their functionality. RBI governor Raghuram Rajan has hinted at the possibility of having small banks or niche bank that caters to specific segments or borrowers. He has also hinted at the possibility of creation of payment banks from prepaid payment issuers. The existing organizations like NBFCs, tele-communication companies, real estate cooperatives may apply. But as evident from the previous round of license allocation, the organizations with extensive presence in rural India will obtain the licence.

As per the Deputy Governor of RBI, R Gandhi, banks are working on setting up “Rural ATMs” and they will need to use currency notes of smaller denominations [4]. But more than ATMs in rural regions, which in anyway would not be cost effective, there is a need of mobilisation of funds. The mobilisation of funds can be achieved by stimulating more savings and loan accounts across the rural India. A systematic approach needs to be taken in which the livelihoods of the rural customers needs to be understood, repayments schedule and collection strategy [ 5] should be aligned with income pattern. These approaches will not only decrease NPA but also increase savings revenue.

It will be difficult to force the foreign banks to set up branches in thinly populated rural areas, it will be erroneous to force the PSU banks to set up branches in these areas and face losses. The only solution is to capitalize the existing players (SHGs, NBFCs, Business Facilitators, Business Correspondents etc) in these regions and use their infrastructure, human resource and other components in exchange for reaching the remote regions of the country.

This article has been authored by Sayan Ghosh from Faculty of Management Studies 








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