The Hindu Business Line : Financial inclusion

Bank branches in rural pockets are attracting growing business volumes. And the nationalised banks should get cracking if they are not to lose the first-mover advantage.

With banks continuing to veer away from rural to urban India, the number of rural bank branches has shrunk even as urban branches proliferate, and the Government pays lip-service to financial deepening and economic inclusion. As a percentage of the total network, rural branches have shown a perceptible decline over the last seven years. Does this mean the end of the road for financial inclusion? Not necessarily. Even as the number of new bank branches continues to be urban-centric, the smaller numbers that continue to grow in rural pockets are attracting growing business volumes. And there are other dynamics at work that may yet make inclusion a successful proposition.

There can be no doubt that Rural India is still under-represented in the banking industry. While 50 per cent of all commercial bank branches were in rural regions in June 2000, the share declined to 44.2 per cent in June 2006. Rural branch expansion has been far behind the growth in the urban centres.

Not surprisingly, even in absolute numbers, while there were 32,709 rural branches of commercial banks in 2000, the number fell to 30,754 in 2006. Does this imply that banks have been closing rural branches and re-locating to urban India? Given the Government's firm commitment to financial inclusion as well as RBI's strong diktats against rural branch closures, this seems unlikely. Also these numbers run counter to the reports of economic resurgence in rural India, as financial institutions rush to exploit newer economic opportunities.

Getting Reclassified

There are two possible explanations for the decline in the number of rural bank branches. One, that rural pockets are getting subsumed into ever-expanding urban sprawls, or villages are themselves transforming into smaller townships — driven by their inherent economic dynamism.

According to the banking lexicon, bank branches are categorised as `rural' when they are located in areas with a population of 10,000 or less. As development activities accelerate, attracting a fresh stream of migrant workers, rural pockets graduate into smaller cities and townships — and rural bank branches are automatically re-classified as urban branches. No doubt, the process will accelerate financial deepening.

Therefore, one should use greater discretion when reading of State Bank of India and associate banks' losing 285 rural branches between 2000 and 2006. And of nationalised banks losing 904 branches in the same period. As if to reinforce the point, even regional rural banks, which account for one out of three rural branches, lost 1,030 rural branches. While the penchant among banks to focus on urban India remains as strong as ever, the economic awakening of pastoral India is forcing several of them to sit up and take notice. This is evident in the slow but subtle shifts in the banking sector's credit portfolio. Between March 2004 and 2006, deployment of credit to the farm sector grew 90 per cent, from Rs 90,541 crore to Rs 1,72,292 crore.

Viable Activity

This is not only an indicator of greater financial inclusion and deepening, but also that agriculture is no longer taboo to large sections of the banking industry. In effect, agriculture in India is maturing into a viable economic activity and, in several instances, government stipulation is no longer required for extension of credit.

By comparison, the extension of credit to small, medium and large-scale industry in India remains huge, although the growth is at a relatively slower pace. Between 2004 and 2006, credit to industry grew by 75 per cent, from Rs 3,13,065 crore to Rs 5,49,057 crore.

Ipso facto, the growing focus on agriculture and allied services by the banking industry is not necessarily a proof of greater financial inclusion. Nor does the falling number of rural branches stand testimony to the reverse. There seems to be inherent merit in the argument that greater numbers are getting into the economic mainstream as rural pockets merge into the urban areas and others upgrade into into smaller towns and cities. But there are other dynamics at work in rural India that herald an accelerated pace of economic development. There are clear indicators that, as bank branches proliferate across urban India at the cost of the hinterland, the demand for more rural branches is growing.

In a recent speech, the RBI Deputy Governor, Ms Usha Thorat, said that from 1991 to 2001 to 2005, the population served by a bank branch grew from 13,711 people to 15,209 and 15,680. Significantly, the growth was even more meteoric in the case of rural branches, where it jumped from 13,462 people to 15,667 to 16,650. The urban branches, meanwhile, showed a decline from 14,484 to 14,137 to 13,619. This is a clear indication that the rural population is growing, leading to increased demand for banking services.

Buoyed by an ebullient rural awakening, savings from rural India surged by 31 per cent. Simultaneously, urban-rural remittances have increased as migrant populations began sending back their earnings to the villages. And in many areas, subsistence agriculture is increasingly giving way to commercial farming, such as horticulture and floriculture — requiring substantial capital infusion, and often technology transfer.

Reflecting on this transformation occurring in rural India, the National Council for Applied Economic Research (NCAER) has said that the low-income population in rural India has come down from around 65 per cent during the early 1990s to 25 per cent now. Meanwhile, middle-income households in rural India have gone up from 33 per cent to 70 per cent. Almost 50 million households have transcended from the low-income to the middle-income bracket in this period.

Affluent Hinterland

This is reflected in a sudden spurt in demand from India's increasingly assertive and affluent hinterland. Rural India now accounts for 53 per cent of the fast moving consumer goods market. Even more telling, close to 59 per cent of demand for consumer durables emanates from rural India. And going by common logic, the rural middle-class population would, rather than approach a moneylender for financing his purchase of a refrigerator, television, two-wheeler or car, prefer going to a bank or an NBFC.

The rural aversion of the banking industry is a historical legacy. Traditionally rural branches were loss-making, poorly run, poorly staffed — in short, an economic liability. That no longer seems to be the case but most banks are yet to lose that inherent aversion. As economic opportunities mushroom across rural India and the banking sector continues to slumber, the non-banking financial companies are awakening to the booming demand from rural households for refrigerators, television sets, air-conditioners, two-wheelers and cars. As the demand arises from deep in the vast hinterland, the NBFCs are making more aggressive inroads into the rural areas.

No doubt, rural banking had a pioneering role to play in sowing the seeds of development in India's agrarian society, but few of those nationalised banks are reaping the rich rewards now. If they don not look smart, they could lose the vital first-mover advantage.

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