Banking on Bharat

Written by Sitanshu Swain | Updated: Jul 24 2011, 06:15am hrs
Banking is coming full circle. Today, at the top of agenda in all boardroom discussions is not corporate or retail banking or consolidation in the sector, but making the most of financial inclusion plans through rural banking and business correspondent model.

Indian banks are now revisiting old statistics: out of 600,000 habitations (clusters where the population is 100 or more) only 30,000 habitations have commercial bank branches, and less than half of the population have bank accounts. The disparity is greater in the Northeastern part of India, with 37% of the population still living below the poverty line.

KC Chakrabarty, deputy governor, Reserve Bank of India (RBI), says the role of the Indian banker has become very challenging today. At one end of the spectrum lies the demand to achieve financial inclusion because nearly 50% of the countrys population is yet to be covered under the formal system of banking and at the other end lies the task to fulfill the needs of the existing customer.

The latest National Sample Survey Organisation (NSSO) statistics speak about the narrowing gap between the countrys rural and urban households. While rural households have increased their spending by about 63%, their urban counterparts are marginally up by 68%.Bankers agree that the next wave of growth in India is likely to be driven by rural India. The rural consumption market is likely to triple by 2020 to reach $600 billion from the current level of $190 billion. With increasing income levels and shifting consumption pattern, rural India is expected to provide a plethora of opportunities to lenders and industries. They are viewed as a significant unfulfilled demand and also a considerable pull for financial products, as RBI and the government of India are making financial inclusion a top priority for all banks, especially the PSBs.

KV Kamath, chairman, ICICI Bank, says that rural India has over the years emerged as an important driver of Indias growth. The rural economy has become diversified and is now estimated to account for close to half the countrys GDP. Thus, rural India contributes significantly to the industrial and services sectors, in addition to the agriculture sector.

Kamath says, Rural India also represents a large and fast-growing market for many goods and services. Government policies and schemes introduced over the last few years have enhanced the resilience of the rural economy. The growth in per capita income in rural India will lead to accelerated reduction in poverty and socio-economic inclusion, and have significant positive outcomes for the economy as a whole.

Moreover, after doubling the agricultural credit in the last couple of years, for the 2011-12 fiscal, the government has raised the crop loan target for banks to R4,75,000 crore, which is expected to provide direct boost to rural economy.

Apart from covering unbanked areas where banks are learning to provide basic services through the business correspondent (BC) model, they are planning to open over 2,000-2,500 branches in 2011-12

The BC model is still at its nascent stage. To get any loan sanctioned, the customer has to go to the nearest rural branch and help in creating a synergy between BC and rural business, explain bankers.

Most banks are planning to recruit exclusive officials for rural branches and develop suitable technological platforms for their operations in these areas to achieve financial inclusion.

The State Bank of India (SBI), the countrys largest bank, is planning to open around 500 branches in rural areas in 2010-11. Besides opening branches, the bank has appointed more than 35,000 customer service points (CSPs) including 20,700 business correspondent CSPs and 14,400 business facilitators. Some of the national levels BC/BFs are India Post, ITC, National Bulk Handling Corporation, Reliance Dairy, and Hindustan Unilever.

Pratip Chaudhuri, chairman, SBI, says, In order to further strengthen the manpower in rural and semi-urban centres (RUSU), which now handles 37% and 25% of the banks total domestic deposit and credit portfolio respectively, a new cadre of permanent officers (probationary officersrural business) has been created. More than 1,500 such officers have already joined the bank.

His predecessor OP Bhatt had circulated a concept paper arguing that if rightly focused, the bank could grow three-fold in a matter of years by only expanding its rural business. SBI has about 5,138 branches in rural areas out of its total network of 13,500 and most of them are profitable. Rural and semi-urban branches contribute 30% of the total business of the bank and in the last two years the bank has gained a market share of 2-3% in rural areas.

Chanda Kochhar, CEO & MD, ICICI Bank, the second largest bank, says the group has undertaken several initiatives to meet the financial services needs of the rural market. We continue to focus on improving our product and service offerings to meet the requirements of all participants in the rural market including farmers, traders, commission agents, small processors and other medium agri-corporates. We have also built lending capability in over 1,000 of our branches for products targeted at individual customers in the agri-value chain. New product initiatives have been also undertaken during the year to enhance credit flow towards the micro and small enterprises sector.

ICICI Banks board has already approved a three-year financial inclusion plan that envisages the opening of no-frill savings accounts and expanding rural reach over the next three years along with the provision of credit to select individuals in the target segment through various product lines comprising micro-credit, kisan credit card, farm equipment loan and loan against jewellery.

Kochhar adds, We have also focused on opening accounts for routing benefit payments under various government schemes and have received the mandate for opening accounts of individuals under these schemes in certain states. Further, the bank has also identified 23 business correspondents having a network of 208 customer service points to service these customers.

KR Kamath, CMD, Punjab National Bank (PNB), too, says that the bank is working hard to achieve financial inclusion goals and is in the process of finalising its plans for opening rural branches for the current fiscal. How these branches will become profitable will depend on the place where we will be opening them.

Saying that the bank has identified 450 of its existing branches that can go for focused lending in rural areas during the current fiscal, MD Mallya, CMD, Bank of Baroda, adds, We are also looking at opening 75-80 branches in rural areas during the current fiscal, which can be used for providing services like accepting deposits and lending. The break-even time for these branches is two years.

Others are following suit. Saying that all the existing rural branches constitute nearly 55% of the banks total branch network, contributing 30% of total business of the bank, M Narendra, CMD, Indian Overseas Bank, adds, We are opening 400 branches in the current fiscal and one-fourth of them will be in rural areas. Rural branches contribute 20% of the banks total deposits.

RM Malla, CMD, IDBI Bank, too, says the bank will open over 50 rural branches. There is always an issue of recruiting the right kind of people for those branches and imparting thorough training to them. We are basically looking at increasing retail customers when it comes to our expansion plans in rural areas.

Earlier, the RBI had directed that domestic scheduled commercial banks (SCBs) will have to allocate at least 25% of the total number of branches to be opened during a year in unbanked rural centres (tier-5 and tier-6 centres) for which the banks dont require any regulatory approval.

Though financial inclusion plans of banks indicate that they propose to use BCs in a big way to reach out to unbanked villages, there is a need to open more brick and mortar branches, besides the use of BCs, the RBI said.

This is needed to achieve the goal of bringing banking services to 72,800 identified villages by March 2012, and thereafter progressively to all villages over a period of time, said the apex bank, which had earlier lamented the fact that the ratio of rural branches to the total branch-network had fallen in last 20 years.

Even as banks are rushing to convert a social obligation into a business opportunity, reaching rural customers comes with a price tag. The main challenge, bankers point out, lies in financial education: helping the masses to understand these products, and the benefits of saving and investing. The faster the users of banking services learn of the benefits, the shorter will be the banks gestation period in recovering its investments in rural and unbanked areas.

Banks on their part are deploying low-cost information and communications technology for rapidly accelerating rural penetration, both in terms of initial enrollment and ongoing servicing. ICICI Bank has tied up with Vodafone and Aircel for extending basic financial services through the mobile platform. The plan is to leverage the penetration and the distribution infrastructure of the mobile network operators. The key is to expand, keeping the costs low.

Financial Inclusion Explained

Banking coverage

A village is covered by banking service if either a bank branch is present or a BC is physically present or visiting that village.

The names of villages covered and the name of the branch/ BC should be available on the banks website.

It is not enough to just offer no-frills accounts.

At the minimum, four banking products need to be provided for it to qualify as availability of banking services:

A savings-cum-overdraft account

A remittance product for electronic benefit transfer and other remittances

A pure savings product ideally a recurring or variable recurring deposit

Entrepreneurial credit such as General Credit Card (GCC), Kisan Credit Card (KCC)


Villages with above 2,000 population covered by banking services increased from 27,743 (Mar 10) to 53,397 (Mar 11) Number of villages covered through BCs increased from 33,158 (Mar 10) to 76,801 (Mar 11)

Number of no-frills accounts increased from 49.55 million (Mar 10) to 74.39 million (Mar 11)

No of KCCs/GCCs increased from 20.19 million (Mar 10) to 23.44 million (Mar 11)

Total villages covered by banking services projected to increase to 2,23,473 (Mar 12) to 3,48,283 (Mar 13)

Number of no-frills-accounts projected to increase to 109.6 million (Mar 12) and 153.3 million (Mar 13)


Perceived more as an obligation than a business opportunity. Business model yet to evolve.

Delivery model yet to be perfected especially when there is a glitch, hence scaling up is an issue.

Banks are still engaged in ecosystem development.

Need for more BCs.

Need for training BCs and ensuring their financial viability.

Corporate BCs still need to be stabilised.