Indian banks ignore rural market in spite of financial inclusion buzz

Over the past eight years, the proportion of rural branches has fallen sharply while urban, semi-urban centres have grown

Manojit Saha Mumbai

Amid the hullabaloo surrounding financial inclusion, which is about extending banking facilities to the unbanked, ground realities tell a different story. 
Recent data released by the Reserve Bank of India shows the proportion of rural branches to the total number of branches has fallen to 38.5% as on March, 2014, down from 44% in March 2006. 

Though the data is a year old, there is no reason to believe that things have changed drastically in that time. 
According to RBI data, rural branches, that is, branches in centres with population of less 10,000, grew at a compounded annual growth rate (CAGR) of 5% in the eight-year period (2006-2014) for which data has been released. That is less than the 6.76% average growth rate of total branches. The CAGR for semi-urban (population 10,000 and above but less than 1 lakh) and urban branches (1 lakh and above but less than 10 lakh) was 9% and 7.5% respectively, while metropolitan branches (population above 10 lakh) grew by 6.86%. 

The clamour for opening branches in centres which already have a large branch presence defies all business logic. 
In a recent interaction with Business Standard, C VR Rajendran, former chairman and managing director of Andhra Bank, explained why urban branches are not profitable. According to Rajendran – who spoke to this newspaper just before superannuating on April 30, 2015 – the bank’s share of current and savings account deposits (Casa), which are low-cost deposits hence margin accretive, in Andhra Pradesh (except Hyderabad) is 40% while in Telengana it is 50%. Contrast this with branches in metropolitan cities like Hyderabad and Mumbai, where the Casa ratio is 11-12%. 

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“We have focussed opening more branches in rural and semi-urban areas as they are profitable than urban and metropolitan branches,” Rajendran said. He added that Andhra Bank has actually not opened branches in metro areas, allowed the eligibility to lapse. If a bank opens 25 branches in rural and unbanked areas, it can open 75 branches in other centres. 
The RBI data also showed a wide disparity in credit flow among states, which is reflected in the credit-deposit ratio (as per utilisation). The southern and the northern states lead the chart in terms of getting credit where the C-D ratio is as high as 97.4 (southern states) and 93.6  (in northern states) for 2013-14. This means, for every Rs 100 rupees collected as deposits in the region, more than Rs 90 was given as loan. For eastern and central region states, the ratio is between 50 – 52%. 

If a bank gets Rs 100 as deposit, it has to set aside Rs 4 as cash reserve ratio and Rs 21.5 as statutory liquidity ratio. So effectively, only about Rs 75 for every Rs 100 can be used for lending, which is reflected in the overall C-D ratio which is 79 (the ratio is slightly higher as banks also raise funds by bonds, borrowing etc, which are used for lending). 
What is clear from the regional disparity in credit deposit ratio is that eastern and central Indian states have actually funded the northern and southern state, since the deposits raised from the former has not been fully funded in those states. 
(Manojit Saha is Banking Editor at Business Standard)

First Published: May 11 2015 | 8:48 AM IST

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