Sensing fierce competition in the banking sector ahead of the entry of new banks, universal banks are reworking their rural banking strategy. At present, rural and semi-urban deposits account for 53 per cent of the deposits of scheduled commercial banks, according to data from the Reserve Bank of India (RBI).
To begin with, State Bank of India (SBI) will have an edge over others on account of its 30 per cent stake in the proposed payments bank of Reliance Industries. While leveraging the partnership, SBI is also looking at tie-ups for referrals with other payments banks.
“The payments banks will essentially be technology-driven. To provide last-mile connectivity, they might be interested in having a tie-up with a bank. Thus, we see an opportunity of a tie-up with payments banks. The regulations do not prohibit us from any tie-ups with payments bank. The rural banking pie should substantially increase after the entry of new banks,” said GopalKrishan Kansal, chief general manager, rural banking, national banking group, SBI.
Small finance banks are willing to give higher interest rates of more than 100 basis points (bps) to garner deposits, as they will have to depend on public deposits to start their business. Notably, in a short span of two months, Bandhan has garnered Rs 2,200 crore as deposits. It is offering higher interest rates of by up to 20 bps against the market rate to attract depositors.
Rural deposits alone account for 20 per cent of the deposits of scheduled commercial banks. In some states, the dependency on rural deposits is higher. For example, in West Bengal, rural deposit accounts for 30 per cent of the total deposit of banks.
“In the initial phase, we might have to offer interest rates which are higher by even 100 bps from market rate. Initially, we can afford this because at present, our cost of fund is higher than 13.50 per cent. So initially, if the market deposit rate is 7.75 per cent, we can offer 8.5 or nine per cent. Gradually, we’ll have to replace our term deposits with public money,” said Govind Singh, managing director and CEO, Utkarsh Micro Finance.
“Many banks have approached us for a tie-up. Private sector banks are showing more eagerness in tie-ups,” added Singh.
There are limitations in the operations of both small finance and payments banks. Payments banks cannot accept deposits of more than Rs 1 lakh, while small finance banks have restrictions on credit disbursements.
UCO Bank, too, is looking for a tie-up with a new upcoming bank.
“In future, we do expect fierce competition ahead in garnering rural deposits. We are strengthening our business correspondent model, and are also looking to tie up with payments and small banks. These banks don’t have a branch network, but have a good rural reach. They can act as our referral points for services which they cannot provide, but what we can provide,” said Charan Singh, executive director, UCO Bank.
While universal banks are not in a position to offer high interest rates at present due to constrained margins, the new banks will be able to do so, as the cost of their public deposits will be much less than their present cost of funds from banks, which is close to 13 per cent.
“We are in touch with many banks for a possible tie-up,” said S R Bansal, chairman and managing director, Corporation Bank.
Replicating the microfinance model, several banks have also started the group lending model through self-help groups (SHGs), which involve a weekly collection mechanism.
For example, United Bank of India rolled out a management information system for a revamped business correspondent (BC) model. Under this, the bank would appoint BCs who can offer a gamut of services such as conducting weekly group meetings in SHGs, disbursing loans, collecting deposit and recovering them. The bank, which has a rural deposit base of Rs 280 crore at present, expects it to go up to Rs 800 crore by March 2016, and to Rs 1,600 crore by September 2018, according to Sanjay Arya, executive director, United Bank of India.
Andhra Bank, too, is revamping its BC model to include weekly loan collection and tie-ups with SHGs.