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Asia-PacificJuly 1 2013

India's banks reach out to rural areas

India may be one of the most populous countries on earth, but a small proportion of its population has access to a bank branch. As the case for financial inclusion grows, lenders are clamouring to take advantage of what has been described as 'the largest banking opportunity in the world'.
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The harsh reality in India is that of its 660,000 cities, towns or villages with a population of 1000 or more, only 5% have a commercial bank branch. While there may be 900 million mobile phones operating in a population of 1.2 billion people, Anand Sinha, deputy governor of the Reserve Bank of India, says that India is largely underbanked. Only 13% of the population has a debit card. For credit cards that number shrinks to just 2%. India's banking base remains alarmingly low.

Non-urban India accounts for more than 70% of the country's population, and it is these people that represent “the largest banking opportunity in the world”, according to Uday Kotak, managing director of Kotak Mahindra Bank.

Financial inclusion

While politicians argue over India's economic reforms and the perceived slowdown in the country's economic growth, which is forecast by analysts to fall in the range of 5.7% to 6.4% in the 2013/14 fiscal year, the key issue in the country remains the establishing of a viable business model based around financial inclusion.

For bankers such as Chanda Kochhar, managing director of ICICI Bank, India’s second largest bank by Tier 1 capital, the government’s financial inclusion initiative is very important in driving growth for banks. She explains that financial inclusion has brought in 10 million “previously unbanked” accounts, enabling a range of products to be offered to these customers. ICICI is opening 1000 branches in small rural areas in the near future, and while opening a large branch in a small village is unlikely to be profitable, Ms Kochhar says that using the business correspondent model, whereby an agent provides banking services, reduces this cost.

With the introduction of the government’s Aadhaar unique identification system, whereby every citizen has a 12-digit biometric identifier, the Reserve Bank of India (RBI) hopes to reduce the role of unauthorised money-lenders in villages and spread financial inclusion through the government’s Direct Benefit Transfer anti-poverty programme. This will create opportunities for savings, credit and remittances, and is expected to be a boom for banks operating in the country.

Dr K C Chakrabarty, deputy governor of the RBI and a key driver of financial inclusion, explained in a recent article: “The banking industry has a vested interest in the development of society because when society develops, people’s economic condition improves and banks get more business. Banks that understand this will be able to convert. Though the general impression is that public sector banks are more into this line, but believe me, in this country, financial inclusion will be brought in by private sector banks.”

Ms Kochhar is confident the Aadhaar project will provide considerable benefits for all, especially in the know-your-customer area. “We will grow on the back of the economy and India’s growth will be credit-intensive. European and US banks are now less involved in funding in India, therefore India’s large banks have a larger role to play,” she says.

Strong progress

At the State Bank of India (SBI), the country’s largest bank by Tier 1 capital, progress is also being made. Under its financial inclusion project, 20.5 million new accounts have been added in rural areas (7 million since the end of March 2013), according to A Krishna Kumar, SBI managing director and group executive of national banking, although this makes up a relatively small number when put in the context of SBI’s more than 200 million accounts. 

Bangalore-based Canara Bank has also participated in the country's financial inclusion directives, opening more than 6.2 million basic savings bank deposit accounts (no-frills accounts). These facilities include an inbuilt overdraft facility that is expected to build trust among small, remote settlements and wean them away from unregulated money-lenders.

Of India's financial inclusion efforts, Mr Chakrabarty acknowledges there is still a long way to go, but says: “When we have financial inclusion, we empower the poor and that facilitates inclusion in other aspects of society.”

Sustainable turnaround

Despite weak investment and consumption figures, and disappointing growth of only 5% in the 2012/13 fiscal year, bankers appear cautiously optimistic about India's economy being able to achieve a sustainable turnaround in the 2013/14 fiscal year.

Rana Kapoor, managing director of Yes Bank, the country’s fourth largest private bank by Tier 1 capital, says: “The Indian banking sector has grown at an impressive compound annual growth rate of 23% from 1999/2000 to 2009/10 and has still managed to grow at 17% over the past fiscal year, despite the deceleration in economic growth. Indian banks should consolidate this impressive growth and focus on spreading their wings through increasing their financial outreach. With retail credit to gross domestic product standing at 11%, and only 11 branches per 100,000 adults, Indian banking is still highly underpenetrated; particularly with banks being the primary intermediaries in the financial system, the potential in new growth/rural areas is significant.

“With the implementation of Basel III, private sector banks will continue to gain market share, given the capital constraints facing public sector banks in the medium term, and capitalise on the opportunities available. The RBI is also likely to license new banks over the next year or so, with a strong focus on financial inclusion and rural banking. We believe that with the right checks and measures, this will be good [for the country's] progress.” 

New banks

The RBI’s Mr Sinha says that later in 2013 a “committee of eminent people” will examine the applications and advise on the allocation of the new banking licences, which are expected to be issued in the first quarter of 2014. Applicants will be given one year to set up the bank. The RBI is open-minded on the number of new licences to be issued; the applications need to be from Indian residents but are not limited to financial services operations, although there is a requirement of 10 years’ business experience and a minimum capital of Rs5bn ($87.2m).

Do the new licences represent a threat to existing banks? Most see the new banks as a good thing in this highly unbanked market, bringing in new capital with specific requirements for new branches in rural areas. The general consensus seems to be that the newer banks present an opportunity for the overall banking system to innovate with product offerings and the latest technological applications. They will also provide a mechanism to reach not only the vast rural populace, but also the semi-urban landscape of the country. This means that the new licences are widely seen as a diversification rather than a threat.

Yes Bank and Kotal Mahindra Bank are two banks that emerged from the new licences issued in 2002. They have taken nearly a decade to become established nationally, so it is clear that successful licence applicants in 2014 will have a long and difficult track ahead.

So what is the outlook for India’s banks? Many bankers are optimistic and those that believe the Aadhaar project will be fully implemented also believe that financial inclusion will be a huge benefit to all. Others are less sanguine but nevertheless positive. In a February report, ratings agency Standard & Poor’s said: “For at least the next 12 months or so, India's banking sector is likely to continue to bear the effects of slow economic growth and the sluggish pace of fiscal reforms. However, S&P sees signs that the troubles for the country's banking system are close to bottoming out. And we project that the situation is likely to get better in the financial year ending March 31, 2015.”

S&P expects that India's economy and individual corporate performances will gradually improve given the government’s reform initiatives, which could spur growth, and projects growth of about 5.5% for the year ending March 31, 2013, 6.4% for the year ending March 2014 and 7.2% for the year ending March 2015. Such growth could clearly boost banks along with significant growth through Aadhaar-related financial inclusion. The outlook is promising.

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