Banks' rural bad loans high at 40% says RBI

Banks suffer a high default rate of about 40 per cent in rural areas, as against just 10 per cent by non-governmental agencies engaged in providing microfinance.

Banks need to understand better their loan customers in rural areas to improve recovery rates closer to around 90 per cent enjoyed by microfinance NGOs, said R B Barman, executive director, Reserve Bank of India.

NGOs lend at rates above 20 per cent but their default rate is less than 10 per cent, Barman told reporters on the sidelines of a banking technology seminar organised by Confederation of Indian Industry (CII).

Public sector banks, private sector banks and regional rural banks had aggregate loans outstanding at about Rs 1,39,000 crore at the end of September 2006.

Barman said banks need to revamp the way they evaluate customers in rural areas. "They need to do much more than they currently do," he stressed.

He said better recovery rates were all a function of knowing more about customers. NGOs manage to keep their default rates low because they understand customers and their cash flows better.

Speaking at the seminar earlier, Barman said the RBI wanted to reduce the volume of cheques used as a medium of payment. He said cheques account for 70 per cent of payment transactions in the country, but only 25 per cent in value terms.

Listing some of the changes that confronted the banking sector, Barman referred to the task of serving the rural areas. While information technology was a solution, ultimately it would be the people who would use the system that would make it a success or a failure.

"IT can help, but it is the people who drive the initiative," he pointed out.