Private banks in the process of getting hold of rural India

India’s private sector banks are trying to take over public sector banks especially in rural India, in this process they are opening hundreds of new branches.

As per the Reserve Bank of India’s (RBI) norms the banks do not require to take permission for opening of branches in tier III to VI centers such as in smaller towns and villages, having population below 50,000.

The banks have also been permitted to open branches in rural, semi-urban and urban centers in north eastern states and Sikkim without its approval.

But the foreign banks have not been given the same relaxation in the norms for the opening of branches.

For Indian banks rural branches are very important as banks are able to generate cheap money. Moreover the rural people keep bulk of their money in savings account on which banks give 3.5% interest and this money is used in creating loan assets in urban centers.

There are around 79,933 bank branches in the country out of which 40% of the branches are located in rural and semi-urban centers. Around 31,666, are located in rural India and 19,057 branches are in semi-urban centers.

An anonymous senior HDFC Bank Ltd official informed, “The branch banking team is identifying locations.”

He added, “These branches will help us meet the priority sector requirements, conduct commodity and agriculture finance related business and also garner low-cost deposits.”

As per RBI norms, 40% of loans have to be given to the so-called priority sector or agriculture, small scale industries, etc.

The banks are able to generate such loans from rural branches.

Amongst the private sector banks majority of them have achieved the overall priority sector target of 40% but HDFC Bank, ICICI Bank Ltd, Axis Bank City Union Bank Ltd, Development Credit Bank Ltd, Federal Bank Ltd, Yes Bank Ltd and Kotak Mahindra Bank Ltd have been disburse around 18% of loans to the agriculture sector and 10% to weaker sections.

As per the RBI data, four banks - Bank of Rajasthan Ltd, Development Credit BankLtd, Karur Vysya Bank Ltd and South Indian Bank Ltd have not achieved the 40% target in 2009.

In rural areas HDFC Bank, India’s second largest private sector bank by assets has 1,500 branches and has got licenses to set up another 580. Axis Bank is having 941 branches.

At these branches apart from low-cost deposits, there are selling points of other financial products such as insurance and mutual funds and can add to banks’ fee income.

Romesh Sobti, managing director and chief executive officer of IndusInd Bank Ltd said, “There has to be low cost business model in place for these rural centers. They offer good market for sale of low value insurance products and garner small ticket size deposits.” The bank has 210 branches.

On the other hand Amitabh Chaturvedi, managing director and chief executive officer of Dhanlaxmi Bank Ltd, told he has instructed his team to prepare a list of under-banked centers Chaturvedi said. Dhanlaxmi has recently set up 66 new branches.

The bank has signed an agreement with A Little World, a technology company that provides financial services in remote areas through the use of mobile phones and biometrics, and Financial Information Network and Operations Ltd, a company that deals in micro banking industry by providing technologies to financial institutions that serves the rural sector.

All the private banks are working out plans to get hold of the vast potential of rural markets but they are not revealing anything about their plans as yet.

Rupa Rege Nitsure, chief economist, Bank of Baroda, pointed out as the cities have reached to the saturation point therefore it has become important for the banks to capture rural markets. “It is not necessary that one has to associate rural India with only agriculture there are many allied activities which banks can fund such as dairy, fishery, plantation and food processing.”

Nitsure informed, “The World Bank is also providing financial assistance to various state governments to improve agricultural productivity in rural areas through soil and water conservation and rain water harvesting. These projects also open up good business opportunity for the banks”.

As per RBI norms it is mandatory for the banks to open at least one-third of their branches in under banked areas.

This is one of the key criteria for the Indian central bank to give licenses to banks to for the opening of branches in larger centers.

Public sector banks, have about 70% of banking assets, are not much affected with the private bank plans but have plans to strengthen their hold on rural business.

J.M. Garg, chairman and managing director of Corporation Bank said, “We compete with them (private and foreign banks) in urban areas and still growing very healthily, why should their entry in rural areas worry us?”

A senior official of the country’s largest lender State Bank of India said, “They (private sector banks) are going there because we have established a business case there. They are following us”.

Anup Banerji, deputy managing director and group executive told State Bank plans to create 2,000 rural cadres who will stay in rural India for 10 years and take care of the rural business.

In view of this bank also plans to adopt hub and spoke model for the expansion of its branches in 300 districts. Through this, bank aims to cover every village in these districts through branches or business correspondents.

Corporation Bank has opened 60% of its branches in rural and semi-urban areas and the bank is planning to open more branches in rural areas. Garg pointed out, “The business growth from rural and semi-urban branches is 40% compared with 30% from urban area branches. This alone enthuse us to open more branches in rural areas.”

M.V. Nair, chairman and managing director Union Bank of India, has plans to open 500 new branches in the next 12-15 months and 50% of them will be opened in under-banked centers. At present bank is having over 2,750 branches. Nair, who is also the chairman of bankers lobby Indian Banks Association, said, “There is a lot of opportunity for both private and public sector banks in these unbanked centers as they are untapped.”