- The
share of agriculture in GDP has fallen from 43 per cent in 1970s to 20 per cent
currently; within this, the share of food grains and cereals has declined from
31.7 per cent to 24.1 per cent and that of commercial crops increased. Within
the agricultural sector, the share of fishing and livestock has gone up from 20.3
per cent to 29.3 per cent. Agriculture is getting increasingly diversified as
floriculture horticulture and other value added activities gain importance.
- The
proportion of rural households, described as low income by National Council for
Applied Economic Research (NCAER), has gone down from two thirds in early 90s
to 25 per cent currently and those with middle income from one third to 70 per
cent. This represents increase of 50 million middle income households in rural
areas.
- Retail
credit has grown in the last four years by nearly 50 per cent per annum mostly
at urban centres. As incomes increase, there is growing demand for retail credit
in rural areas that is perhaps being met by the informal sector. Anecdotal evidence
suggests that moneylenders in rural areas face more competition from other moneylenders
rather than from the banks.
- With
the growing rural connectivity and tele-density, a host of non-farm activities
are mushrooming in the rural sector. Currently, the rural market accounts for
53 per cent of the Fast Moving Consumption Goods (FMCG) and 59 per cent of the
durable market in India. The rural consumers represent more than 50 per cent of
the country's `consuming classes'.
Part
- III: The Way forward – some thoughts
Having
discussed the rural urban divide in banking and the potential in rural banking,
the question that remains to be addressed is – how can banks meet the challenges
of banking in the hinterland?
(i)To
start with, I believe, fuller utilisation of existing capacity can itself give
huge dividends. Given the existing number of nearly 48,000 rural and semi-urban
branches, an increase of loans by rupees one crore per branch could imply additional
profits of about Rs.480 crore to the banking system.
(ii)
Currently each rural branch services only around 1000 loan accounts. If we assume
that a bank branch can serve at least 3000 households, it would imply at the minimum
tripling of the business at rural branches This might require redeployment and
some increase in staff, especially field staff, and would be more than worth the
effort considering the increase in business and profitability that it would result
in.
(iii)
Banks would need to decide the kind of delivery channels required for meeting
the banking and remittance needs of the rural population. Today the branch is
not the only way of delivering banking services. All options such as mobile and
satellite offices, rural ATMs, smart card and mobile phone based banking, use
of intermediaries including SHGs, including post offices need to be explored for
penetrating into the rural markets. Several banks have tie-up arrangements with
corporates engaged in contract farming. IT solutions can take banking to the remotest
corner and cut costs apart from providing valuable databases for furthering business
strategies. Whatever be the mode of penetration, it is clear that unless there
are well thought out strategies for marketing banking services in the hinterland,
banks will be missing emerging opportunities. As mentioned earlier 50 million
households in rural areas have moved from low income to high income giving rise
to equal number of potentially bankable households. To look at the scope for branch
banking and provision of banking services through other delivery channels in rural
areas, banks can make use of the research already available on the monthly per
capita expenditure centre-wise and district-wise, corroborated by data on consumption
patterns for FMCG and mobile phones as also other indicators of expenditure patterns.
(iv)
Banks need to have appropriate strategies for rural banking. Rural clientele need
savings, remittances, loan and insurance products. When banks think of agricultural
credit they generally think of crop loans especially, food crops. The needs of
agriculture are, however, getting diversified and the required scale of finance
is increasing. There is much more demand for allied activities such as dairy,
fishing and livestock, cash crops, besides ancillary activities such as sorting,
grading, processing, packaging and transporting to final destinations and markets.
Other service sector activities that spin-off the main activities are also growing.
This is giving rise to additional credit demand from a variety of new enterprises,
besides demand for retail and consumer credit. Are banks geared for the surging
credit demand in the rural areas in all sector, particularly allied agriculture
and services sector?
The
strategies of banks will need to focus on the following:
A
uniform banking/financial product for the entire country would obviously not work.
Products need to be designed and packaged taking into account local culture, customs,
language, literacy and social indicators. Also, rural households need to be provided
credit in a composite way covering all their needs, including life-cycle needs;
the traditional crop loans, term loans, housing loans, consumption loans bouquet
may not work. Regional offices of banks may need to be delegated with appropriate
powers for product design, while ensuring consistency with Board policies. Banks
need to look at the overall cash flow of rural households and fix general credit
limits, which could be scaled up depending on new/additional activities taken
up.
- Creating
awareness and brand building
Banks
need to consciously evolve strategies for financial education in the rural areas.
Products developed for the region will need to be actively marketed in a responsible
and effective manner, with top priority at all times being accorded to transparency,
customer education and satisfaction.
- Having
the right staff for marketing products
In
rural lending there is an imperative need for the marketing staff to be knowledgeable
about agricultural practices and operations, besides being well acquainted with
the features of the products and their suitability to the targeted category of
customer. In a sense, providing financial services will also involve providing
extension services as a risk mitigant. Hence, banks will need proactive technical
officers who can not only provide such services, but also train their field staff.
Another very important requirement is relationship management in terms of face-to-face
familiarity and continuity of contact. Surely, it is not without reason that the
rural folk are comfortable with persons like the postmen and even the local moneylender,
with whom they have occasion to regularly interact. Banks would do well to address
this need for building up a relationship and rapport with the rural clientele.
- Use
of Information Technology (IT)
There
are a variety of ways in which IT can be used by banks. Delivery of banking services
through IT based solutions, such as mobile phones and smart cards, while keeping
costs low, is one huge opportunity for increasing outreach afforded by modern
technology that is rapidly innovating. Other uses of IT are in credit risk management
and pricing, which require maintaining a comprehensive computerised data base
– this can be used for a variety of purposes, such as marketing, credit scoring,
pricing, credit monitoring including rating migration and devising appropriate
internal control systems, etc. There is clearly a need to have credit information
companies across the entire country; the huge externalities associated with having
comprehensive credit records can be derived for more efficient financial intermediation.
With appropriate IT solutions in place and suitable field staff, banks can also
provide market insurance and capital market products for increasing their non
funded business.
- Developing
and using risk mitigants
The
three important risks identified in agricultural lending are yield risk (or input
output risk), calamity risk and price risk. Banks will need to aim at minimising
these risks if they have to deliver affordable credit to agriculture. Extension
work, including proper advice on use of fertiliser and pesticides, ensuring quality
seeds and inputs are activities that minimise yield risk. Enterprises providing
such services would need to be supported by banks and actively encouraged. Calamity
risk minimisation involves insurance of crops and assets, including of livestock/cattle
and fisheries. While restructuring of loans can provide more time for repayment,
repeated rescheduling could lead to instalments ballooning beyond the repayment
capacity. Banks will have to evolve policies to address this issue while providing
vulnerable groups opportunities to engage in activities that supplement the household
income at times of natural calamities. Development of appropriately priced insurance
products is obviously a challenge especially id such insurance has to be affordable
and sustainable. Price risk in agriculture is inherent, having regard to the nature
of agricultural operations where supply cannot respond to prices immediately.
Hence, price support policies have been followed over the years. A more recent
development is the futures markets, which can provide opportunity to hedge risks.
However, the players in these markets are mostly traders and speculators. There
is a need to find ways in which commodity markets can be used to provide price
support to farmers.
A
separate strategy for micro finance may have to be evolved, as this involves providing
low income families with access to banking. Invariably banks have found it advantageous
to partner with community based organisations and NGOs working in the area for
micro-finance. Promoting SHGs, nurturing them and transforming them from micro-finance
to micro enterprise is something many banks are already engaged in. Banks could
explore the possibilities of working with the State governments by offering them
efficient technology solutions, such as smart cards for distribution of budgeted
allocations for NREGP, pension payments and various other social sector expenditures.
As some of you may be aware, a pilot project is under way in Andhra Pradesh (AP),
where the AP government will tie up with banks, who will offer smart cards to
BPL families /pension recipients /NREGP workers for disbursements of wages, pensions
and other benefits. These smart cards can be operated at village level through
VOs – federated SHGs registered as cooperatives- that are eligible to be used
as business correspondents by banks. It is expected that as the SHG members get
used to the smart cards, there will be return flow of funds as they use their
bank accounts for savings. The cards could also be used as normal debit cards
at merchant establishments.
- Regional
Rural Banks (RRBs) as partners
One
in every three rural/semi urban branch in the country is an RRB branch. Moreover,
the staff members of RRBs belong to the region and have knowledge of local language
and customs. These are significant strengths and need to be leveraged by sponsor
banks, who should view RRBs as their partners in rural banking. The initial costs
for up scaling technology and skills in the RRBs will be amply rewarded by the
benefits that would accrue in due course.
Conclusion
Competition
in urban areas is squeezing bank margins. Even though agriculture contributes
only 20 per cent of GDP, the rural population constitutes 70 per cent of population
and as reported accounts for 60 per cent of consumer durable market. This implies
that there is an untapped business potential for aggressive banking in the rural
areas. The challenge lies in locating these areas and providing them with the
financial services through appropriate delivery channels and products. I am sure
that the banks with their extensive network of branches in the rural areas will
be able to leverage their presence and meet these challenges.
My
thanks to the Indian Banks Association and Rural Marketing Agencies Association
of India for giving me this opportunity for delivering the keynote address at
this conference. I am sure that the day’s deliberations will bring new insights
to banking in the hinterland. I wish the conference every success.
Thank
you