Rural banking big opportunity for Indian banks

March 5, 2011 at 3:20 pm | Posted in Additional business, The Market | Comments Off on Rural banking big opportunity for Indian banks

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Rural banking big opportunity for Indian banks

By Rana Kapoor Jan 03 2011

Tags: Column, Yearender 2010, Companies

INDIAN banking has traditionally been driven by the assumptions that rural banking is not

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lucrative and the ‘vulnerable’ rural population needs to be protected with a patronising approach.

Such directed approach has undermined the financial sustainability of the rural banking sector. This has been looked upon in the banking sector as a regulatory obligation, and for the banking staff, rural posting got equated with ‘punishment’. This led to perpetual brewing of negativity towards rural banking in India.

Despite having one of the world’s largest network of about 79,000 banking

outlets, (out of which 31,000 are in rural areas), we have just 15 crore savings bank accounts for a population of 118 crore.

Access to a savings bank account is the very basic. However, it is definitely not a sufficient indicator of financial inclusion.

In order to meaningfully tap the rural banking opportunity, we need to find solutions to three important challenges namely (1) infrastructure set-up costs, (2) operating costs and (3) risk mitigation strategies. However, the conventional banking approach has so far failed to address these challenges, and therefore, we need to adopt the ‘frugal innovations’ approach to develop a scalable and sustainable business model.

Frugal innovation is a whole new management philosophy, which integrates specific needs of the bottom-ofthe-pyramid, as a starting point, and works backwards to develop appropriate

solutions which may be different from existing solutions designed to address needs of other customer segments.

One very pertinent example of frugal innovation for rural banking is our homegrown self help group (SHG)-bank linkage programme. SHG is a voluntary, often non-registered association of up to 20 persons which bridges the ‘last mile’ gap between a rural branch and poor households living in its vicinity. Due to the efforts of RBI, Nabard, SCBs, state governments and numerous civil society organisations, about 9.7 crore households now have access to banking through SHGs.

Interestingly, this model has a strong pro-rural, pro-poor and pro-women bias.

The business correspondent (BC) model advocated by RBI is another pertinent example of potential frugal innovation in the financial inclusion space.

The use of BCs enables banks to extend banking services to the hinterland.

Banks use various types of hand-held devices (aptly nicknamed micro ATMs) to authenticate micro-transactions at the BC location and to synchronise the same with a central server.

A working group constituted by RBI for developing common open standards for such devices has opened up the possibility of nationwide networking of such micro-transaction devices based on the common authentication system that will be provided by the unique identification authority of India (UIDAI). When put in practice, this will become the world’s biggest ATM network developed at nominal costs.

Innovations should not be restricted only to technology. Commensurate innovations on the risk management front are also necessary. Banks need to retrospect why despite a proven track record

of more than 15 years, the per person credit outstanding in SHG-bank linkage model is merely Rs 4,128, whereas the microfinance institutions, which organise joint liability groups, are able to take an initial exposure of almost double this amount. Banks also need to study how several gold loan NBFCs are able to provide gold-based secured lending at a rate much higher than what banks charge for a similar product.

The risk management framework needs to adapt itself to the changing macro-economic scenario and new opportunities emerging as a consequence thereof. In sum, from processes, procedures, technologies and even human intervention, frugal innovations should be extended to every aspect of banking to deliver a holistic range of financial services to the rural areas in a cost-effective and efficient manner.