Mumbai: Subramanian M.V., president and head of rural and inclusive banking at Axis Bank Ltd, recently visited a remote village some 25 km from Hazaribagh in Jharkhand.

The village does not have roads. Subramanian had to ride pillion on a motorcycle. It does not have electricity but a local grocery store supplies power through two generators to 150 families at 100 per month, provides a direct-to-home (DTH) television service, and sells life insurance and a pension scheme to the villagers.

Axis Bank hopes to tap villages like these to capture the emerging consumption story in India. The bank has already opened 200 savings bank accounts through the grocery store and hopes to open 800 more in the next three months.

Large private sector banks, which for long have avoided rural India, are now expanding in this market, buoyed by rising wages, increased consumption and higher demand for credit. Rural India is home to two-thirds of the country’s population.

HDFC Bank Ltd, ICICI Bank Ltd and most recently Axis Bank have increased their branch presence in rural areas as they prepare to tap the large unbanked population

Their expansion is benefiting people like Lajma Bano, a 35-year-old mother of three from Salempur village in Barabanki district of Uttar Pradesh, who is paying back the second loan she took from HDFC Bank to start her own embroidery business.

The monthly 1,441 instalment does not bother her because she manages to save 3,000 to 4,000 even after paying the loan.

“Earlier I used to do the same work for someone else and get paid 2,000 to 2,500. Since I took my first loan about one-and-a-half years ago, my family’s income has increased and I can send my cloth directly to Lucknow," Bano said.

HDFC Bank was the first among the large private sector banks to tap the opportunity. It has added 150 rural branches so far this fiscal to take the total number to 400. It plans to add another 72 by the end of the current fiscal. The bank has 3,119 branches and 53% of them are in semi-urban and rural pockets.

K. Manohara Raj, executive vice-president and business head of sustainable livelihood banking at HDFC Bank, said the business started in 2010-11 after a board directive to reach 10 million households or 50 million people in rural India.

“We have reached 1.9 million customers so far but there is a huge potential because there are 625,000 villages in the country. Each of these branches act as hubs covering villages within a 25-km radius. Each branch includes a unit manager and 10 field officers," Manohara Raj said.

ICICI Bank has also rapidly increased its rural branches, doubling its rural branch network to 650 in 15 months since March 2012.

“Almost 50% of our total branches are in rural or semi-urban areas. We have got a dedicated team of almost 10,000 people for this line of business, offering end-to-end products to the farm sector," said Sanjeev Mantri, senior general manager and head of rural and inclusive banking at ICICI.

“We also have about half-a-million women customers who are aided by lending through SHGs (self-help groups). We are among the fastest growing private sector banks in this business," Mantri added.

With 3,382 branches, ICICI is the largest private sector bank in the country.

Axis Bank is trying out two models to reach the unbanked.

In one, it has partnered with IFMR Rural Channels and Services Pvt. Ltd (IRCS), a Tamil Nadu-based banking correspondent which services people in Coimbatore, Ariyalur and Pudukkottai, since June 2012.

Besides partnering IRCS, Axis Bank also has started to lend through Axis Sahyog (the bank’s in-house microlending programme), which started in the second-half of 2012-13. Axis Sahyog lends in Madhya Pradesh and Bihar. Apart from the bank branches it also uses the offices of subsidiaries like Axis Capital Ltd to offer loans.

IRCS has its own branches through which it not only sources customers for loans but also sells life insurance and new pension schemes (NPS).

Axis Bank branches act like a hub to IRCS branches. The bank’s 10 branches in these districts are surrounded by a network of 38 IRCS branches.

“They help us source the loans and even do a background check on a revenue share basis," Subramanian said. The total outstanding loans stand at 50 crore but the portfolio is being “scaled up". Axis Bank now plans to replicate this model in other states like Maharashtra and Chhattisgarh. “The break-even will happen in four to four-and-a-half years but revenue sharing is required because it helps to share risk," Subramanian said.

“We cannot take exposure beyond a certain amount even while IRCS is doing a good job. The portfolio has grown to 75 crore, we have six branches each in MP and Bihar," Subramanian said.

The minimum ticket size for these loans is between 10,000 and 15,000 per individual but bankers said the initial signs are encouraging.

“We have seen groups that started three years back with initial funding of 70,000 now taking loans of 5 lakhs," Mantri of ICICI Bank said, adding that most of these rural loans are either secured by land or are shared by members of an SHG reducing the chances of a default.

“Delinquencies are manageable and with the monsoon looking good this year, it should be fine. Of over 600,000 villages in the country, only 240,000 are covered by branches or service points. There is a fair amount of unpenetrated market across the country," Mantri added.

To be sure, this proposition is still loss-making because the initial costs of setting up operations, training staff and reaching people are high.

Bankers believe this phase is temporary and as their network develops, not only will the costs come down but it will also help them increase the size of loans.

“We are spending 250 per member per day to make them aware about the products. But after two to three years when their credit absorption capacity increases and infrastructure and people are in place, this will become profitable," Manohara Raj of HDFC Bank said.

Axis Bank’s Subramanian said the bank has a strategy to go “deeper" into the rural market to tap small businesses and finance individual consumer loans.

“FMCG (fast-moving consumer good) companies are selling refrigerators and air-conditioners. Somebody needs to fund that. There is a market but very few banks have exploited that. We want to be there," said Subramanian. He has identified 25-30 districts in Rajasthan, Gujarat, Haryana and Punjab to tap the rural affluent with high farming income or receive handsome remittances.

He estimates that the business needs at least three to four years to break even but in the long run the lenders will benefit as the rural market is likely to be a beneficiary of large-scale government subsidies.

S. Ranganathan, head of research at LKP Securities Ltd, said it is too early to judge the impact this rural push will have on these banks’ balance sheets.

“These banks are heading towards rural markets, chasing consumption growth. Even public sector banks, especially in some northern states, have seen traction in terms of both deposits as well as loans," Ranganathan said.

According to him, rural banking looks a better bet for private banks seeking loan growth at a time when big sectors like power have slowed.

In May, the Reserve Bank of India (RBI) asked banks to “front-load" their expansion in the rural unbanked areas in their next financial inclusion plan for 2013-16.

“While the requirement of allocating at least 25% of total number of branches proposed to be opened during the annual branch expansion plan in unbanked rural (Tier V and Tier VI) centres will continue, credit will be given for the branches opened in unbanked rural centres in excess of the required 25% of the plan for the year..." RBI said in a notification on 28 May.

Mantri said the regulator is clear that most of the new branches must be opened in rural areas. “We already got 303 gramin branches in the last 15 months in areas which were devoid of any banking facility," Mantri said.

The so-called gramin branches are opened in pairs, covering two villages. Three employees work in one branch for the first-half of the day and serve another branch in the second-half. This helps the bank mitigate costs and increase productivity, Mantri said.

Banks’ interest in rural lending has increased after the spectacular fall of the local micro finance companies that gave small loans to the poor.

Micro-finance institutions, or MFIs, suffered after the government in Andhra Pradesh, the largest market for such companies, passed a law in October 2010 which made government approval mandatory for every second loan extended to an existing borrower, lengthened the loan repayment cycle from every week to every month and barred MFIs from approaching borrowers’ homes.

The law was introduced following reports that coercive loan recovery methods adopted by some MFIs were prompting over-extended borrowers to kill themselves.

Following the law, defaults rose sharply and lending almost came to a standstill. Microfinance loan exposure halved from 30,000 crore to 15,000 crore.

Subramanian from Axis Bank said the fall of microfinance companies, together with the restriction imposed by the central bank on priority sector loans, have forced banks to look at rural lending.

In October 2012, RBI said banks must directly lend to producer companies of individual farmers and cooperatives of farmers directly engaged in agriculture and allied activities to make up their 40% priority sector lending target. Earlier, this target could be met by buying securities or loans from companies lending in the rural areas.

Subramanian said the RBI regulation has forced banks to go to the rural areas on their own, leading to better credit and risk assessment.

“Earlier we used to just give money to MFIs and we could not control day-to-day activities but now since credit decision is taken by us there are enough checks and balances," Subramanian said.

Besides the loan benefits, Axis Bank has also discovered rural branches with good potential for deposits, he said.

N.K. Thingalaya, former chairman and managing director of Syndicate Bank and an expert on rural banking, said the challenge for these commercial banks would be to find the right kind of people to post in rural areas.

“People are important in banking but more so in rural areas. These employees should be trained to understand their customers and also the banking business," Thingalaya said.

Lowering their loan rates in rural areas should also be a priority for these banks, Thingalaya said.

“Expenditure in villages is less because rent and employee compensation is low. Banks must ensure that these are passed on as lower rates so that they can reach out to a larger section of the population," Thingalaya said.

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