The Hindu Business Line : Rural banking — Opportunity for diversification and growth

STATE Bank of India, the country's largest bank, recently announced that it would shift its focus to Rural India to boost the retail portfolio. According to its Chairman, there is business opportunity in rural India. Similarly, ICICI Lombard plans to market weather insurance in the rural areas.

Urban-oriented banks and financial institutions see business prospects in shifting focus to the rural sector. They had not given this market much attention hitherto. A large pool of high net worth individuals, traders, entrepreneurs, processing industries, marketing and warehousing agencies, market intermediaries, professionals, educational institutions, plantations and so on provides a wide range of business avenues and market for these institutions to diversify the risks and also seek growth.

The development of the telecom infrastructure in the rural areas has made doing business easy. Marketing intermediaries and loan recovery agents have brought down the cost of operations. Recent studies indicate that the actual level of non-performing assets (NPAs) in the rural sector is less than elsewhere, and this coupled with the low cost of operations, less expensive labour, infrastructure, cost of living, and so on make Rural India an attractive market.

Success, however, depends on using the right strategies and the ability to foresee the growth of this sector. Many economists and policy-makers increasingly believe that future growth of the domestic economy to a large extent will depend on the robust performance of the agriculture and rural sector. The manufacturing and service sectors cannot sustain the economy's growth if the rural sector underperforms.

Despite decades of effort and experimentation in banking, the organised financial sector is still not able to meet the credit gap in the rural sector. It took time for banks to realise the potential of the rural markets. Lack of infrastructure in the rural areas and the focus in the urban sector were the reasons. Directed and subsidised lending, cumbersome procedures, delay in sanctioning loans and lack of statutory backing for recoveries were major impediments to the growth of banking in the rural sector.

The focus in the past has always been to make available cheaper credit. When banks are forced to lend cheap, there has been a tendency for a scramble for credit by the non-target group of beneficiaries. Empirical data indicate that various measures to make available cheaper source of credit have failed to achieve the desired results and led to wilful defaulting because such loans gets written off for reasons mainly political. This has really damaged the credit culture and structure in the rural sector.

The rural sector needs timely credit. Due to the failure of the organised sector to make an impact in bridging the credit gap, the informal credit sector has been thriving and is able to lend as high as 24-36 per cent per annum depending on the borrowers' risk profile.

The concepts of lending based on credit history and risk perception being implemented in the organised sector now have been in vogue in Rural India's informal credit sector for long. It is time to find out why the informal credit sector thrives despite efforts to reduce the credit gap.

Banks need to make loan procedures simple and accessible if they want to make inroads into the rural sector. If banks can offer housing and car loans through simple procedures in urban markets, it is ridiculous to have cumbersome and complicated procedures in the rural sector. Simplification of loan procedures and credit accessibility will attract quality and high net worth borrowers.

Recent Budget announcements on the availability of agriculture credit at soft rates are welcome, but better credit delivery systems are required for Rural India.

The success of the informal credit sector proves this point. To boost credit growth, banks should be permitted to lend at different rates depending on the borrower's risk profile. This will help develop a superior credit culture.

Recent measures to strengthen the loan recovery mechanism through the SARFESI Act will help develop the credit culture. Healthy competition and market forces will achieve free flow of credit at lower cost.

The Government should play a supportive and regulatory role in developing the investment climate. It should facilitate private and public sector investments for developing infrastructure in Rural India. Greater acceleration in development can be achieved through such direct incentives as exemption of tax on all private sector employment generation activities in the rural sector. As banking is the engine of growth, it would be worthwhile to exempt rural earnings from tax.

Maybe the Government, apart from its own involvement, ought also to work on schemes to attract corporate investment in infrastructure, education and health. Infrastructure is a key factor in the development of the rural sector and even the President, Dr A. P. J. Abdul Kalam, has been advocating this aspect through PURA (providing urban infrastructure in the rural areas).

The Government and trade bodies should forge partnerships to attract domestic and foreign investment, because investments here will generate huge direct and indirect employment opportunities. Banks with their presence and exposure in the rural sector can play a creative role in such road shows.

Such projects as the Golden Quadrilateral and the proposed interlinking of rivers can boost Rural India's economy. Major economic activity should be set up along the project corridors to gainfully utilise the investments.

Domestic economic growth depends on the rural sector. Therefore, the corporate sector should focus on this sector. The external sector is attractive and offers exceptional opportunities, but in case of global economic slump, it is the rural sector than can sustain domestic growth. Advantages offered by the rural sector, such as cheap labour, need to be fully exploited by the domestic companies.

Banks should harness the rural savings, though smaller because of the lower income, and direct them towards productive sectors. Investment avenues for the urban population, such as government debt, mutual funds and capital market instruments, as also insurance products should be made available to the rural sector too. Information and communication technology can help banks convert rural networks into financial marts. Banks today have surplus liquidity and those that succeed in directing the surplus funds to productive sectors will gain. Banking is becoming increasingly complex and those that fail to tap the potential of the rural sector will stand to lose.

The overhead cost of operations for banks in Rural India will be more because of low business per employee and the large number of small clients. However, mechanisation and centralisation of accounting as also decentralisation, cheaper office premises, engagement of external agents for recovery of loans and marketing of products will make up for the other drawbacks. Taking the cue from a few banks and financial intermediaries that have big plans to make a foray into the rural sector, other banks also need to re-draw their strategies at the earliest.

(The author is Assistant General Manager, Department of External Investment and Operations, Reserve Bank of India.)

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