Apart from the increased cost involved in setting up rural branches and a solid distribution network, the low margins and minimal volumes are a discouraging propostion for banking aspirants. RBI, in final guidelines on new banking licences, said all new banks will have to set up 25% of their branches in unbanked regions with population less than 9,999.
Inclusion is not an established and viable model still. The volumes and profitability, both are low here, said Ashvin Parekh, the partner, Ernst & Young. Parekh acts as a consultant to many companies that want to apply for the new banking licence.
Most public sector banks that have ventured into the financial inclusion and rural banking businesses, did not have positive experiences. Even established private sector players like HDFC Bank seem to be finding it tough, to service these regions.
It is difficult to service (the rural and semi-urban areas), the volumes are smaller, but the demand is there, says Aditya Puri, managing director and chief executive officer, HDFC Bank.
According to Parekh, the bank accounts that came into existence thanks to government programmes like the Mahatma Gandhi National Rural Employment Act (MNREGA) are not profitable for banks, since the average monthly balance held in them are around R200.
Over and above there is a cost related to setting up relevant technology, power supply in branches and selecting the right geography for a branch, Parekh said.
Hemant Kanoria, the chairman and managing director of Srei Infrastructure Finance, a banking licence aspirant, also echoes similar sentiments. It is not easy to set up operations in rural areas. It is like counting pennies. The margins will not be very high. The costs of setting up infrastructure in unbanked areas is also high, he says.
Over the last five to six years, Srei Infra has been building its rural network, by investing around R300 crore. The company now has 28,000 rural centres employing 1,200 people mainly in the Eastern and Northern parts of the country, including Bengal, Assam, Uttar Pradesh and Orissa, said Kanoria.
Other non-banking finance companies (NBFCs) seem to be better poised to make use of this opportunity. The Shriram Group has already set up a number of rural centres across India to improve its presence. For NBFCs like Mahindra Finance, over 90% business already comes from semi-urban and rural areas.
In most other markets, it took about four to five years for the financial inclusion approach to turn viable, so the time required in India should not be drastically different, Parekh said.
Players, who are already in the game, say juggling between profitability and financial inclusion is not an easy game. Banks approaching the rural and unbanked locations in India will have to focus on giving out customised products to these customers, while turning their business model on its head.