Rural Banking - Achieving Inclusive Growth

Posted in Finance Articles, Total Reads: 6884 , Published on 21 August 2011

India is a land of villages with majority of Indians forming the large chunk of rural population. There are around 600,000 numbers of villages in India out of which only 32,500 villages have banking facilities. If India needs to grow, then this number has to significantly row. RBI has prepared a roadmap for ensuring that all villages with a population of over 2,000 will have access to financial services through a banking outlet, not necessarily a bank branch, by March 2012. Banking in rural areas can provide much needed push to our economy.

Rural Banking - The Way Ahead ?

An average Indian farmer has nowhere to go to but to money lender for his credit requirements. Consider a simple case where a farmer harvests a bumper crop. As there is no way of saving the money, the farmer is forced to buy gold in order to save money. This conversion of cash to gold is a lost opportunity not only for banks but for the entire economy as a whole.  This money could have been for used for productive purposes. Moreover, investment in gold is illiquid form of investment. If the farmer needs to borrow money, he goes to money lender who charges an interest rate of 30-40% pledging his precious gold as security. If there was a bank in his area, he would have deposited his money in the bank account earning interest on it. Also, bank would have charged less interest rate, at least 4 times, for loan disbursal.

Let’s look at some numbers highlighting the state of rural banking in India. India has a population of 1.2 billion. According to industry estimates there are about 335 million bank accounts. Considering, people with multiple accounts, there are around 200 million Indians who can be considered having bank account. Of this, industry estimates that there are 18 million accounts in rural areas. This is a very small number when 60% (0.6*1.2 = 720 million) of population resides in rural areas contributing to 40% of the GDP.

RBI has taken certain steps to increase banking facilities in the rural areas mandating banks to open at least 25% of their new branches in un-banked rural areas with a population over 2,000 and offer priority sector lending.

Many banks have taken initiatives in spreading their wings in rural areas. First step would be win trust of the people. They will have to convince the people that their money is safe with them rather than money lender. The urban model which has high staff cost will not work in rural area. Banks will need to hire local people who understand the needs of people such that local people feel comfortable with them. The key to success would be to find innovative approaches to reach the rural masses. It is not feasible to build brick and mortar branch in every village. Many banks have opened branches depending on the population of the village, some use business correspondent while some use mobile vans which visit different banks offering credit as well as other banking facilities. SBI has opened biometric ATMs in the rural areas which captures user’s thumb impression on an electronic chip in the debit card, enabling him to make withdrawals with a simple swipe. ICICI bank has tied up with Vodafone and SBI has tied up with bharti airtel to offer mobile banking services to rural users. The telecom operator’s customer service outlets and retailers serve as contact points. Also, with the help of the mobiles, they will be able to remit money. Providing Infrastructure and technological connectivity still remains a challenge.

Amid these challenges, there is tremendous potential for banks in rural areas. Banks will not be profitable overnight but in the longer run it provides a great opportunity. It is absolutely essential to provide banking services in rural areas for achieving inclusive growth. Role of government will be very critical in supporting the banks in this initiative.


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