Pvt banks branch out, but remain close to cities

ICICI Bank?s Khatwa branch in Rajasthan is not far from Jaipur. Similarly, the village of Mangalya Sadak in Indore, Madhya Pradesh, where HDFC Bank recently opened a branch, is not exactly in a remote area, nor is Federal Bank?s Nilavarapetti branch near Salem.

But all of them fit in the Reserve Bank of India?s (RBI) category of being located in ?unbanked? regions, which is why private sector banks, who like their public sector peers have financial inclusion targets to fulfill, are setting up branches here.

Federal Bank, for instance, makes sure its unbanked area branches are not more than 100 km from a main hub branch? all of its 24 unbanked area branches are located close to large cities such as Chennai or Bangalore. The RBI norms require banks to allocate at least 25% of the branches, which they plan to open in a year, in unbanked rural regions ? typically tier 5 and tier 6 towns with a population of less than 10,000.

Banks also need to provide banking services to unbanked rural areas with a population of less than 2,000.

Staying close to bigger towns make sense for private sector banks.

As Jaideep Iyer, senior president, YES Bank, points out: ?Since these branches are closer to urban areas, customers are more sophisticated and business prospects are better than in remote centres.?

YES Bank has opened branches in villages between Nashik and Kalyan in Maharashtra.

Iyer explains that most unbanked branches work under bigger branches in the neighbouring towns and cities in what is known as a hub and spoke model.

Paul Abraham, COO, IndusInd Bank, said the bank is looking to open clusters of banks based in villages around eastern Uttar Pradesh, Chattisgarh and eastern Maharashtra and Northeastern states. ?This helps us reduce costs, create a larger footprint and brand recognition.?

In contrast, public sector banks are moving out into the remotest parts of the country.

One common thread linking the widely dispersed villages of Amauna in Bihar, Kesargarh in West Bengal, Noksen in Nagaland, Vavda in Gujarat or Barcem in Goa is that State Bank of India, Punjab National Bank and Bank of Baroda have now set up branches here.

Many of these villages, located in remote corners of the country, have become strategic spots for banks looking to meet financial inclusion targets.

Private banks, particularly new entrants, are not to be seen in these parts ? the task of setting up and running these branches is an arduous one given infrastructure and manpower constraints.

An SBI executive said his bank does business in far-flung parts of the country, from villages in the Naxal-infested areas of Chattisgarh to the Northeast.

?Our business model is different from that of a private sector bank, we have a social objective and profitability is not our only motive,? he said. Several PSU banks believe banking in far-flung regions can be profitable.

SK Jain, executive director, Bank of Baroda (BOB), is one such banker who is convinced banking in unbanked areas need not be unviable although he concedes these branches may take more time to yield returns. While branches in urban regions break even in 19 months, on an average, rural branches could take anywhere between two and three years. Most banks adopt a low-cost model, using minimum staff and asset- light infrastructure, but low volumes make it difficult to grow fast.

Lending is minimal in these areas and banks mostly rely on saving products like insurance and mutual funds.