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आरबीआई की घोषणाएं
आरबीआई की घोषणाएं

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RBI Announcements

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56434618

Banking in the Hinterland

Smt. Usha Thorat, Deputy Governor, Reserve Bank of India

Delivered on Feb 14, 2007

Ladies and Gentlemen,

It gives me great pleasure to be here this morning to share my thoughts on banking in the hinterland. The theme of my talk today is that there is a huge business opportunity in banks going rural. Rural banking has great potential if banks adopt appropriate approach and suitable strategies - scale up their business levels, achieve capacity utilisation and devise innovative ways to cater to the typical needs of the vast rural sector.

I will divide my address into three parts. In the first part, I shall describe the rural urban divide in banking. In the second part, I will describe some changes that are happening in the rural sector. Finally, I will try and elaborate on the kind of strategies that could be considered for banking in the hinterland.

Part - I: The Rural urban divide

Analyses of certain indicators of banking penetration of scheduled commercial banks in the country, including RRBs, amply testify to the rural urban divide existing in their operations/business, as will be seen from the following:

Average Population per Branch Office (APPBO)

The average population served per branch office is an important indicator of banking penetration. The trend in this indicator ever since the last decade is as under:

 

1991

2001

2005

Population per branch

13711

15209

15680

Population per Rural branch

13462

15667

16650

Population per Urban branch

14484

14137

13619


While the population per branch has decreased for urban areas, the same has increased for rural areas indicating that branch expansion has not kept pace with the population increase in the rural areas.

Number of Accounts per 1000 population

The number of deposit (current plus savings) and credit accounts per thousand population is given below:

 

Deposit (C+S) Accounts
per 1000 population

Credit Accounts
per 1000 Population

Region/State

Rural

Urban

Rural

Urban

Northern Region

338

652

55

71

North Eastern Region

186

281

35

41

Eastern Region

185

413

45

47

Central Region

242

375

45

49

Western Region

263

526

46

121

Southern Region

393

486

136

185

All India

270

483

64

104


Source: Computed from BSR 2005 and Census data 2001

It is seen that the deposits (current plus savings) accounts per 1000 population in the rural areas as a whole, is about sixty per cent of the urban areas. North Eastern states, Orissa Bihar and Chattisgarh have particularly low ratio. Similar position is generally evident even in terms of credit accounts per 1000 population. However, Southern states are relatively better off in this regard (Annex 1 and Annex 2).

Number of Accounts per Branch

The number of deposit and credit accounts per branch in the rural areas is generally lower than the position in urban areas as shown under:

 

Deposit (C+S) Accounts
per Branch

Credit Accounts
per Branch

Region/State

Rural

Urban

Rural

Urban

Northern Region

4130

6677

675

771

North Eastern Region

3716

5340

702

781

Eastern Region

3676

6087

887

693

Central Region

4586

6075

859

797

Western Region

3826

6630

663

1530

Southern Region

4549

5571

1577

2121

All India

4202

6155

1000

1321

Source: BSR 2005


Outstanding Balances per Branch

The deposits and credit outstanding per branch also reflect the rural urban divide

 

Deposit (C+S) per Branch
(Amt. Rs Crore)

Credit per Branch
(Amt. in Rs Crore)

Region/State

Rural

Urban

Rural

Urban

Northern Region

6.43

25.22

7.19

46.99

North Eastern Region

5.41

21.03

4.99

13.80

Eastern Region

4.99

18.80

3.99

23.62

Central Region

5.26

15.40

4.51

15.15

Western Region

4.67

26.51

7.72

63.77

Southern Region

4.01

14.41

8.73

32.68

All India

4.98

19.92

6.37

37.94

Source: BSR 2005


It is seen that deposits per branch in the rural areas is far lower than that in the urban areas, notably states in the North East , Northern and Western region. In terms of credit per branch also, the difference is more pronounced in Northern and Western regions.

Outstanding Balances per Account

The outstanding balance per account, both deposit as well as credit, reveals the much larger values in urban areas as evident from the following:

 

Deposit (C+S) Bal per
A/c (Rs 000)

Credit Bal per
A/c (Rs 000)

Region/State

Rural

Urban

Rural

Urban

Northern Region

15.56

37.78

106.46

609.72

North Eastern Region

14.56

39.38

70.59

176.85

Eastern Region

13.57

30.88

44.58

341.00

Central Region

11.46

25.35

52.49

190.06

Western Region

12.19

39.99

116.42

416.71

Southern Region

8.82

25.87

55.39

154.08

All India

11.84

32.36

63.74

287.91


The average size of a deposit account in the rural areas is about one-third the size in urban areas and ranged from about Rs.7000/-(in Andhra) to about Rs.17,000/- (in Punjab). The divide is as is to be expected sharper in terms of credit per account. The average credit account in rural areas ranged from Rs.19,000/-(in Tripura) to Rs.1.31 lakh (in Haryana).

Share of Different Credit Agencies in the total Cash Dues of Households

The share of different agencies in the total cash dues of rural and urban households reveals the extent of penetration of formal financial sources.

(Share in percentage)

Credit Agencies

Rural Households

Urban Households

1981

1991

2002

1981

1991

2002

Institutional

61.2

64.0

57.1

60.0

72.0

75.1

of which

 

 

 

 

 

 

Co-operative Soc/ Bank

..

21.6 

27.3

..

17.2 

20.5

Commercial Banks

..

33.7 

24.5

..

21.6 

29.7

Government

..

6.1 

2.3

..

11.1 

7.6

Non-Institutional

38.8

36.0

42.9

40.0

28.0

24.9

of which

 

 

 

 

 

 

Moneylenders*

..

17.5 

29.6

..

10.2 

14.1

Total

100

100

100

100

100

100

..: N.A.

* The category of moneylenders is the sum of agricultural moneylender and professional moneylender

$ Cultivator households is defined as all rural households operating at least 0.002 hectare of land during the last 365 days preceding the date of survey

Source: Computed from the various decadal All India Debt and Investment Surveys

This table clearly shows that the coverage of banks in the rural areas has fallen from 64 per cent to 57 per cent while, significantly, the share of money lenders has increased from 17.5 per cent to 29.6 per cent in these areas.

Part-II: The Rural sector - some interesting pointers

I would like to briefly dwell upon some facts, which bring home the potential of the rural sector:

  • The savings rate has increased to nearly 31 per cent in the recent period. Remittances from urban to rural areas are becoming more significant as migration increases. The need for banking facilities – savings, remittances and credit - has increased in rural areas.

  • The share of agriculture in GDP has fallen from 43 per cent in 1970s to 20 per cent currently; within this, the share of food grains and cereals has declined from 31.7 per cent to 24.1 per cent and that of commercial crops increased. Within the agricultural sector, the share of fishing and livestock has gone up from 20.3 per cent to 29.3 per cent. Agriculture is getting increasingly diversified as floriculture horticulture and other value added activities gain importance.

  • The proportion of rural households, described as low income by National Council for Applied Economic Research (NCAER), has gone down from two thirds in early 90s to 25 per cent currently and those with middle income from one third to 70 per cent. This represents increase of 50 million middle income households in rural areas.

  • Retail credit has grown in the last four years by nearly 50 per cent per annum mostly at urban centres. As incomes increase, there is growing demand for retail credit in rural areas that is perhaps being met by the informal sector. Anecdotal evidence suggests that moneylenders in rural areas face more competition from other moneylenders rather than from the banks.

  • With the growing rural connectivity and tele-density, a host of non-farm activities are mushrooming in the rural sector. Currently, the rural market accounts for 53 per cent of the Fast Moving Consumption Goods (FMCG) and 59 per cent of the durable market in India. The rural consumers represent more than 50 per cent of the country's `consuming classes'.

Part - III: The Way forward – some thoughts

Having discussed the rural urban divide in banking and the potential in rural banking, the question that remains to be addressed is – how can banks meet the challenges of banking in the hinterland?

(i)To start with, I believe, fuller utilisation of existing capacity can itself give huge dividends. Given the existing number of nearly 48,000 rural and semi-urban branches, an increase of loans by rupees one crore per branch could imply additional profits of about Rs.480 crore to the banking system.

(ii) Currently each rural branch services only around 1000 loan accounts. If we assume that a bank branch can serve at least 3000 households, it would imply at the minimum tripling of the business at rural branches This might require redeployment and some increase in staff, especially field staff, and would be more than worth the effort considering the increase in business and profitability that it would result in.

(iii) Banks would need to decide the kind of delivery channels required for meeting the banking and remittance needs of the rural population. Today the branch is not the only way of delivering banking services. All options such as mobile and satellite offices, rural ATMs, smart card and mobile phone based banking, use of intermediaries including SHGs, including post offices need to be explored for penetrating into the rural markets. Several banks have tie-up arrangements with corporates engaged in contract farming. IT solutions can take banking to the remotest corner and cut costs apart from providing valuable databases for furthering business strategies. Whatever be the mode of penetration, it is clear that unless there are well thought out strategies for marketing banking services in the hinterland, banks will be missing emerging opportunities. As mentioned earlier 50 million households in rural areas have moved from low income to high income giving rise to equal number of potentially bankable households. To look at the scope for branch banking and provision of banking services through other delivery channels in rural areas, banks can make use of the research already available on the monthly per capita expenditure centre-wise and district-wise, corroborated by data on consumption patterns for FMCG and mobile phones as also other indicators of expenditure patterns.

(iv) Banks need to have appropriate strategies for rural banking. Rural clientele need savings, remittances, loan and insurance products. When banks think of agricultural credit they generally think of crop loans especially, food crops. The needs of agriculture are, however, getting diversified and the required scale of finance is increasing. There is much more demand for allied activities such as dairy, fishing and livestock, cash crops, besides ancillary activities such as sorting, grading, processing, packaging and transporting to final destinations and markets. Other service sector activities that spin-off the main activities are also growing. This is giving rise to additional credit demand from a variety of new enterprises, besides demand for retail and consumer credit. Are banks geared for the surging credit demand in the rural areas in all sector, particularly allied agriculture and services sector?

The strategies of banks will need to focus on the following:

    • Developing products

A uniform banking/financial product for the entire country would obviously not work. Products need to be designed and packaged taking into account local culture, customs, language, literacy and social indicators. Also, rural households need to be provided credit in a composite way covering all their needs, including life-cycle needs; the traditional crop loans, term loans, housing loans, consumption loans bouquet may not work. Regional offices of banks may need to be delegated with appropriate powers for product design, while ensuring consistency with Board policies. Banks need to look at the overall cash flow of rural households and fix general credit limits, which could be scaled up depending on new/additional activities taken up.

    • Creating awareness and brand building

Banks need to consciously evolve strategies for financial education in the rural areas. Products developed for the region will need to be actively marketed in a responsible and effective manner, with top priority at all times being accorded to transparency, customer education and satisfaction.

    • Having the right staff for marketing products

In rural lending there is an imperative need for the marketing staff to be knowledgeable about agricultural practices and operations, besides being well acquainted with the features of the products and their suitability to the targeted category of customer. In a sense, providing financial services will also involve providing extension services as a risk mitigant. Hence, banks will need proactive technical officers who can not only provide such services, but also train their field staff. Another very important requirement is relationship management in terms of face-to-face familiarity and continuity of contact. Surely, it is not without reason that the rural folk are comfortable with persons like the postmen and even the local moneylender, with whom they have occasion to regularly interact. Banks would do well to address this need for building up a relationship and rapport with the rural clientele.

    • Use of Information Technology (IT)

There are a variety of ways in which IT can be used by banks. Delivery of banking services through IT based solutions, such as mobile phones and smart cards, while keeping costs low, is one huge opportunity for increasing outreach afforded by modern technology that is rapidly innovating. Other uses of IT are in credit risk management and pricing, which require maintaining a comprehensive computerised data base – this can be used for a variety of purposes, such as marketing, credit scoring, pricing, credit monitoring including rating migration and devising appropriate internal control systems, etc. There is clearly a need to have credit information companies across the entire country; the huge externalities associated with having comprehensive credit records can be derived for more efficient financial intermediation. With appropriate IT solutions in place and suitable field staff, banks can also provide market insurance and capital market products for increasing their non funded business.

    • Developing and using risk mitigants

The three important risks identified in agricultural lending are yield risk (or input output risk), calamity risk and price risk. Banks will need to aim at minimising these risks if they have to deliver affordable credit to agriculture. Extension work, including proper advice on use of fertiliser and pesticides, ensuring quality seeds and inputs are activities that minimise yield risk. Enterprises providing such services would need to be supported by banks and actively encouraged. Calamity risk minimisation involves insurance of crops and assets, including of livestock/cattle and fisheries. While restructuring of loans can provide more time for repayment, repeated rescheduling could lead to instalments ballooning beyond the repayment capacity. Banks will have to evolve policies to address this issue while providing vulnerable groups opportunities to engage in activities that supplement the household income at times of natural calamities. Development of appropriately priced insurance products is obviously a challenge especially id such insurance has to be affordable and sustainable. Price risk in agriculture is inherent, having regard to the nature of agricultural operations where supply cannot respond to prices immediately. Hence, price support policies have been followed over the years. A more recent development is the futures markets, which can provide opportunity to hedge risks. However, the players in these markets are mostly traders and speculators. There is a need to find ways in which commodity markets can be used to provide price support to farmers.

    • Micro finance

A separate strategy for micro finance may have to be evolved, as this involves providing low income families with access to banking. Invariably banks have found it advantageous to partner with community based organisations and NGOs working in the area for micro-finance. Promoting SHGs, nurturing them and transforming them from micro-finance to micro enterprise is something many banks are already engaged in. Banks could explore the possibilities of working with the State governments by offering them efficient technology solutions, such as smart cards for distribution of budgeted allocations for NREGP, pension payments and various other social sector expenditures. As some of you may be aware, a pilot project is under way in Andhra Pradesh (AP), where the AP government will tie up with banks, who will offer smart cards to BPL families /pension recipients /NREGP workers for disbursements of wages, pensions and other benefits. These smart cards can be operated at village level through VOs – federated SHGs registered as cooperatives- that are eligible to be used as business correspondents by banks. It is expected that as the SHG members get used to the smart cards, there will be return flow of funds as they use their bank accounts for savings. The cards could also be used as normal debit cards at merchant establishments.

    • Regional Rural Banks (RRBs) as partners

One in every three rural/semi urban branch in the country is an RRB branch. Moreover, the staff members of RRBs belong to the region and have knowledge of local language and customs. These are significant strengths and need to be leveraged by sponsor banks, who should view RRBs as their partners in rural banking. The initial costs for up scaling technology and skills in the RRBs will be amply rewarded by the benefits that would accrue in due course.

Conclusion

Competition in urban areas is squeezing bank margins. Even though agriculture contributes only 20 per cent of GDP, the rural population constitutes 70 per cent of population and as reported accounts for 60 per cent of consumer durable market. This implies that there is an untapped business potential for aggressive banking in the rural areas. The challenge lies in locating these areas and providing them with the financial services through appropriate delivery channels and products. I am sure that the banks with their extensive network of branches in the rural areas will be able to leverage their presence and meet these challenges.

My thanks to the Indian Banks Association and Rural Marketing Agencies Association of India for giving me this opportunity for delivering the keynote address at this conference. I am sure that the day’s deliberations will bring new insights to banking in the hinterland. I wish the conference every success.

Thank you



Annex-I: State-wise Deposits (Current & Savings) of Scheduled Commercial Banks (Incl. RRBs)

(March 2005)

Region/State

A/c per '000

A/c per Branch

Amt per Branch*

Amount per A/c**

 

Rural

Urban

Rural

Urban

Rural

Urban

Rural

Urban

Northern Region

338.3

652

4130.3

6677

642.6

2522.4

15.6

37.78

Haryana

365.7

589

4752.0

6668

727.7

1749.2

15.3

-

Himachal Pradesh

487.8

-

3313.9

-

569.3

-

17.2

 

Jammu and Kashmir

315.3

480

3523.6

6076

742.6

2116.5

21.1

34.83

Punjab

622.6

622

5290.5

5853

904.2

1463.9

17.1

25.01

Rajasthan

198.5

376

3287.3

5727

365.1

1241.3

11.1

21.68

Chandigarh

1006.7

1411

4416.1

5382

1215.2

1805.1

27.5

33.54

Delhi

720.7

1001

8570.0

7869

2034.2

4171.2

23.7

53.01

North Eastern Region

186.0

281

3716.3

5340

541.2

2102.7

14.6

39.38

Arunachal Pradesh

249.3

0

3184.4

-

974.9

-

30.6

-

Assam

197.7

333

4320.8

5427

541.9

2122.8

12.5

39.12

Manipur

71.6

203

2368.0

5044

321.2

2164.2

13.6

42.90

Meghalaya

170.6

380

2121.9

4776

428.3

2241.7

20.2

46.94

Mizoram

185.4

140

1209.3

5594

236.8

2384.4

19.6

42.62

Nagaland

133.7

0

2996.4

-

876.1

-

29.2

-

Tripura

184.2

365

3251.5

5510

509.6

1721.9

15.7

31.25

Eastern Region

185.2

413

3676.2

6087

498.8

1879.6

13.6

30.88

Bihar

155.0

341

3626.6

6234

483.5

1898.9

13.3

30.46

Jharkhand

222.1

282

3700.3

6623

695.6

2247.6

18.8

33.93

Orissa

189.5

277

3055.3

4133

383.5

1181.6

12.6

28.59

Sikkim

296.4

0

2589.7

-

684.2

-

26.4

-

West Bengal

205.7

511

4156.5

6372

497.2

1965.3

12.0

30.84

A & N Islands

574.6

0

4176.6

-

1075.8

-

25.8

-

Central Region

241.8

375

4586.0

6075

525.7

1540.0

11.5

25.35

Chhattishgarh

151.4

286

2968.3

5548

481.1

1844.9

16.2

33.25

Madhya Pradesh

174.7

315

2901.5

5675

368.2

1283.8

12.7

22.62

Uttar Pradesh

266.2

412

5625.4

6323

579.0

1606.4

10.3

25.41

Uttaranchal

440.8

405

3763.3

5528

695.9

1629.4

18.5

29.48

Western Region

263.3

526

3826.4

6630

466.5

2651.3

12.2

39.99

Goa

2587.0

0

4976.0

-

930.7

-

18.7

-

Gujarat

294.8

448

3954.2

5861

528.2

1530.6

13.4

26.12

Maharashtra

215.2

572

3591.6

6960

362.9

3131.6

10.1

45.00

D & N Haveli

555.7

0

7871.8

-

1889.6

-

24.0

-

Daman & Diw

906.2

0

5705.5

-

1728.9

-

30.3

-

Southern Region

392.8

486

4548.7

5571

401.3

1441.4

8.8

25.87

Andhra Pradesh

309.6

518

4651.1

5764

324.8

1336.6

7.0

23.19

Karnataka

350.1

547

3738.0

5288

324.2

1628.8

8.7

30.80

Kerala

683.1

427

5593.0

4835

548.0

985.6

9.8

20.38

Tamil Nadu

377.3

439

4406.1

5882

431.0

1524.5

9.8

25.92

Lakshadweep

729.7

0

2727.9

-

835.8

-

30.6

-

Pondicherry

792.7

529

6295.1

6997

843.0

1629.7

13.4

23.29

All India

269.6

483

4201.8

6155

497.6

1992.0

11.8

32.36

*: Amount per branch is in Rs. lakhs. **: Balance per account is in Rs.'000
Source : Banking Statistical Returns, Reserve Bank of India, 2005




Annex-2: State-wise Outstanding Credit of Scheduled Commercial Banks (Incl. RRBs)

(March 2005)

Region/State

A/c per '000

A/c per Branch

Amt per Branch*

Amount per A/c**

 

Rural

Urban

Rural

Urban

Rural

Urban

Rural

Urban

Northern Region

55.29

75.26

675.03

770.76

718.63

4699.53

106.46

609.72

Haryana

59.19

54.57

769.04

617.90

1011.18

2144.36

131.49

347.04

Himachal Pradesh

74.25

-

504.42

-

776.24

-

153.89

-

Jammu and Kashmir

35.33

57.23

394.79

724.17

431.56

2806.67

109.32

387.57

Punjab

76.12

60.57

646.88

570.10

759.66

2091.44

117.44

366.86

Rajasthan

47.75

46.54

790.63

708.09

517.97

2214.74

65.51

312.78

Chandigarh

136.02

172.08

596.67

656.50

2907.33

5390.61

487.26

821.12

Delhi

27.51

125.06

327.10

983.02

3332.30

8408.63

1018.74

855.39

North Eastern Region

35.16

41.04

702.48

780.58

495.90

1380.43

70.59

176.85

Arunachal Pradesh

40.88

-

522.13

-

529.49

-

101.41

-

Assam

30.28

47.72

661.70

777.58

461.82

1222.11

69.79

157.17

Manipur

15.57

38.85

514.76

963.57

320.60

1077.70

62.28

111.84

Meghalaya

41.04

51.15

510.54

643.08

1086.77

2798.33

212.87

435.14

Mizoram

56.79

29.89

370.39

1198.36

353.58

2020.55

95.46

168.61

Nagaland

24.44

-

547.73

-

417.74

-

76.27

-

Tripura

88.42

45.79

1561.01

690.83

303.29

875.14

19.43

126.68

Eastern Region

44.70

46.96

887.50

692.80

395.64

2362.43

44.58

341.00

Bihar

31.98

38.21

748.31

698.17

278.22

851.82

37.18

122.01

Jharkhand

45.54

28.29

758.66

664.25

308.94

1773.78

40.72

267.03

Orissa

71.76

66.03

1156.80

983.51

655.67

1949.31

56.68

198.20

Sikkim

61.66

-

538.65

-

672.55

-

124.86

-

West Bengal

45.86

51.02

926.71

635.97

375.96

2927.89

40.57

460.38

A & N Islands

76.26

-

554.30

-

966.39

-

174.34

-

Central Region

45.26

49.23

858.50

797.14

450.66

1515.00

52.49

190.06

Chhattishgarh

33.27

34.36

652.07

667.24

399.96

2261.93

61.34

339.00

Madhya Pradesh

42.06

55.30

698.56

996.06

497.44

1800.58

71.21

180.77

Uttar Pradesh

46.71

48.19

986.95

739.25

433.99

1340.68

43.97

181.36

Uttaranchal

69.16

49.34

590.47

673.42

480.46

1366.14

81.37

202.87

Western Region

45.61

121.36

662.81

1530.40

771.65

6377.29

116.42

416.71

Goa

218.78

-

420.82

-

1004.27

-

238.65

-

Gujarat

49.59

41.57

665.25

544.04

748.07

2894.39

112.45

532.01

Maharashtra

41.25

160.42

688.44

1953.17

747.42

7870.11

108.57

402.94

D & N Haveli

35.26

-

499.50

-

3370.58

-

674.79

-

Daman & Diw

61.38

-

386.44

-

2258.00

-

584.31

-

Southern Region

136.16

185.07

1576.88

2121.00

873.41

3267.98

55.39

154.08

Andhra Pradesh

136.11

93.22

2044.76

1037.07

926.50

2593.53

45.31

250.08

Karnataka

103.11

203.77

1100.83

1970.65

873.75

3138.45

79.37

159.26

Kerala

166.81

87.81

1365.75

994.38

780.39

2362.63

57.14

237.60

Tamil Nadu

148.10

273.86

1729.47

3666.07

897.28

4360.05

51.88

118.93

Lakshadweep

78.08

-

291.89

-

248.22

-

85.04

-

Pondicherry

187.07

90.17

1485.61

1192.90

1015.34

1667.06

68.35

139.75

All India

64.16

103.62

999.94

1320.99

637.41

3793.74

63.74

287.19

*: Amount per branch is in Rs. lakhs. **: Balance per account is in Rs.'000
Source : Banking Statistical Returns, Reserve Bank of India, 2005



Key note address delivered by Deputy Governor, Smt. Usha Thorat at the Conference on 'Banking in the Hinterland' organised by the Indian Banks Association and Rural Marketing Agencies Association of India at Mumbai on February 14, 2007

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