Mumbai: India’s private sector banks are busy drawing up plans to attack public sector banks in their backyard—rural India—by opening hundreds of new branches.
They don’t need to seek the Reserve Bank of India’s (RBI) nod any more to open branches in smaller towns and large villages, the so-called tier III to VI centres with population below 50,000.
The Indian central bank has also permitted private and public sector banks to open branches in rural, semi-urban and urban centres in north eastern states and Sikkim without its approval.
Stiff competition: Punjab National Bank’s branch in Rohtak, Haryana. Public banks plan to strengthen their grip on rural business. Harikrishna Katragadda / Mint
However, foreign banks do not enjoy the same relaxation in branch opening guidelines.
Rural branches are critical for any Indian bank as they generate cheap money. Typically, consumers in rural India keep bulk of their money in savings account that offers only 3.5% interest and this money is deployed in urban centres to create loan assets.
Listen to Bank of Baroda’s chief economist Rupa Rege Nitsure talk about the implications of private banks expanding in rural areas
About 40% of 79,933 bank branches in the country, 31,666, are located in rural India. Another 19,057 branches are in semi-urban centres.
“The branch banking team is identifying locations,” said a senior HDFC Bank Ltd official who did not want to be identified as he is not authorized to speak to the media.
“These branches will help us meet the priority sector requirements, conduct commodity and agriculture finance related business and also garner low-cost deposits,” added the official.
Under RBI norms, 40% of loans are mandated, given to the so-called priority sector or agriculture, small scale industries, etc.
Rural branches help banks generate such loans.
Majority of private sector banks have been able to meet the overall priority sector target of 40% but HDFC Bank, ICICI Bank Ltd, Axis Bank Ltd, City Union Bank Ltd, Development Credit Bank Ltd, Federal Bank Ltd, Yes Bank Ltd and Kotak Mahindra Bank Ltd have failed to meet the sub-targets —18% of loans to be given to the agriculture sector and 10% to weaker sections.
According to RBI data, at least four banks—Bank of Rajasthan Ltd, Development Credit Bank Ltd, Karur Vysya Bank Ltd and South Indian Bank Ltd—did not meet the 40% target in 2009.
HDFC Bank, India’s second largest private sector bank by assets, has 1,725 branches. ICICI Bank, the largest private sector bank, has 1,500 branches and has licences to set up another 580. Axis Bank has 941 branches.
Apart from low-cost deposits, these branches are also selling points for other financial products such as insurance and mutual funds and can add to banks’ fee income.
“There has to be low cost business model in place for these rural centres. They offer good market for sale of low value insurance products and garner small ticket size deposits,” said Romesh Sobti, managing director and chief executive officer of IndusInd Bank Ltd that has 210 branches.
Amitabh Chaturvedi, managing director and chief executive officer of Dhanlaxmi Bank Ltd, said his team is preparing a list of under-banked centres. “We are looking at setting up 125 new branches,” said Chaturvedi. Dhanlaxmi has recently set up 66 new branches.
The bank has tied up 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 serves the micro banking industry by providing technologies to financial institutions that serves the rural sector.
Almost every private bank has drawn up plans to tap the vast potential of rural markets but they are not willing to talk about it openly as yet.
Rupa Rege Nitsure, chief economist, Bank of Baroda, said the rural markets are important for banks as cities are saturated. “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.”
“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,” said Nitsure.
RBI has made it mandatory for banks to have at least one-third of their branches in under-banked areas.
This is one of the key criteria that will be a guiding factor for the Indian central bank when it gives licences to banks to open branches in larger centres.
Public sector banks, which account for about 70% of banking assets, are unfazed but plan to strengthen their grip on rural business.
“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?” asked J.M. Garg, chairman and managing director of Corporation Bank.
“They (private sector banks) are going there because we have established a business case there. They are following us,” said a senior official of the country’s largest lender State Bank of India.
State Bank is planning to create 2,000 rural cadres that will live in rural India for 10 years and take care of the rural business, said Anup Banerji, deputy managing director and group executive.
The bank plans to adopt a hub and spoke model for expanding its branches in 300 districts. The idea is to cover every village in these districts through branches or business correspondents.
Corporation Bank has 60% of its branches in rural and semi-urban areas and the bank plans to open more branches in rural areas. “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,” Garg said.
M.V. Nair, chairman and managing director Union Bank of India, wants to add 500 new branches in the next 12-15 months and 50% of them will be in under-banked centres. The bank has over 2,750 branches. “There is a lot of opportunity for both private and public sector banks in these unbanked centres as they are untapped,” Nair, who is also the chairman of bankers lobby Indian Banks Association, said.
Anup Roy contributed to this story.