The Hindu Business Line : Grassroots banking

The Chairman of the Prime Minister's Economic Advisory Council, Dr C. Rangarajan, has highlighted the need for an incentive structure that rewards banks setting up branches in the rural areas with more liberal permission to expand their network in urban areas. The idea is not new. The Reserve Bank of India had long followed such a policy while licensing banks to open new branches. While this resulted in a substantial increase in the rural bank network in the decades immediately following the nationalisation of major banks in 1969, there has been a perceptible slowdown in more recent times. In the last decade, not only has there been no expansion of the branch network in the rural areas, banks have actually scaled down their presence, albeit marginally. Ironically, it is during this period there has been an unprecedented increase in the number of branches in the metropolitan and urban areas as new and older banks compete vigorously with one another to lure each other's custom. Clearly, either the Reserve Bank of India has given up on the cardinal principle of banking regulation long held by it, or is guilty of being a mute witness to the industry flouting its licensing norms.

Since public sector banks enjoy a dominant share of the banking space, the lack of rural penetration for the industry as a whole is in part because of the strategy they employ in the face of emerging competitive pressures. The traditional culture of risk-avoidance has now been reinforced by a new commitment to profitability that sees no purpose in a strong rural presence. Even the successive Governments, preoccupied as they were with their own survival, didn't insist on it. Rightly or wrongly, there is an overarching belief in the efficacy of higher public outlays in rural areas for securing poverty eradication rather than through the mechanism of financial institutions promoting growth in rural areas by funnelling credit to borrowers or mobilising savings in these areas.

That there is a need for some fresh thinking on the question of how to expand the banking network in the rural and semi-urban areas is not in doubt. Yet it is a moot point if an incentive structure is the optimal solution. The cases of civil aviation and telecommunication offer an interesting insight into how network expansion in areas hitherto thought unviable could be achieved through competition rather than through regulatory fiats. In the telecom industry, for instance, far from having to be given subsidies to put in place rural networks, service providers are actually willing to pay the Government a licence fee to run them. For the banking industry too, the answer perhaps lies in lowering the entry barriers to competition, which will force players to look for profit opportunities in under-banked areas, rather than in erecting fresh ones.

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