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Rural Banking: Reaching the Unreached with Speed and Skill

Rural Banking
Source: Google

Dr BK Mukhopadhyay

(The writer, a noted Management Economist and an International Commentator on Business and Economic Affairs, can be reached at [email protected])

So, we are celebrating 50 years of bank nationalization – 1969 to 2019. Compared to the state of affairs five decades back situation now has changed a lot. Though some gaps are still to be covered up, yet undeniably the gains are more than the gaps! Especially it is rural banking which has been attracting global attention.

Even the World Bank in a very recent report on remittances has been of the opinion that India’s move to set up 11 new payments banks is expected to expand penetration of the banking sector in vast rural areas of the country, Accordingly,  “The decision by the Reserve Bank of India to grant ‘in principle’ approval for 11 entities to set up payments banks, which would be directed at small savers in underserved (largely rural) markets, could help transform the rural remittances market”.

Incidentally, it may be mentioned here that these banks would be subject to regulatory requirements that limit credit risk, (75 per cent of deposit balances are to be in eligible government securities or treasury bills, while loans, credit card issuance, and acceptance of non-resident Indian deposits are prohibited) but would be subject to lighter prudential norms (minimum paid up capital of about USD 15 million, compared to five times that amount for universal banks).

It must be appreciated that in India the banks have been positively responding and implemented the Government’s target to bolster credit flow to the farm sector as well as SME sector. Rural banking has been gaining ground through SHG / SGSY group formations, bank linkages, financial inclusion as well priority sector financing plus expansion of branch network, among others. On this score, not only in India, but for other developing economies also [Bangladesh, Philippines, Vietnam, Sri Lanka, Ghana, among others] the going can be termed as good.

The welcome move is on to ensure adequate credit flow to productive sectors, prevent liquidity crunch as well as to level out loan portfolios. The banks are increasingly aware as to even out their loan portfolios so as to ensure adequate credit flow to productive sector, while prescribing deposits mobilization to head off a possible liquidity crunch. Rebalancing is a pre-emptive step. Efforts are on to rebalance the credit portfolios to see that the productive sectors are not denied credit as otherwise there remains the possibility to suffer from liquidity crunch. Already the overheating signs have been noted.

More than deserved growth is there in sectors like: housing, personal loans, commercial real estates, credit cards, which, in turn, has been witnessing significant credit growth. Banks were also asked to rebalance the portfolios identified by RBI to make sure that the productive sectors, agriculture, in particular, is not deprived of its due share. This, no doubt, could help foster the very growth of the economy and bring in high growth momentum. To sustain a credit growth of 25 per cent the banks are to ensure that the deposits grow by at least 25 to 30 per cent. It is clear at this moment that the overall deposits growth in the recent past had been trailing behind credit growth and the crucial need is there to catch up at the earliest.

Financial Inclusion

Inclusive growth is the current compulsion of a sound public policy. It is true that there has been a convergence in the business interest of the banking community in financial inclusion. As things stand today, India’s banking sector is fast becoming complaint with Basel III standards and the financial sector reforms are on. Though there has been weaknesses – undercapitalized commercial banks, problem ridden [but potential] cooperative banks – yet the very aspect of financial inclusion has been running well in tune with the financial sector reforms now underway. Financial inclusion is to be treated as a business investment. Banks are to move to the masses as a natural process of financial inclusion. It is a fact that to ensure stability on the liabilities side of business, banks are to focus on expanding retail deposits base. This obviously includes taking deposits from rural and semi-urban regions of the country.

For the banks the real need is there to focus on small loans to the farm sector and small and medium enterprises and smaller liabilities since the large corporates are already steadily getting dis-intermediated and have already begun to directly access the financial markets. However, the practice is already there and banks are in the process of financial inclusion very much- opening and operating rural branches, rural coverage, agri-lending, SHG bank linkages, social onus of banks, etc. The process has been given the right name ‘financial inclusion’ [the theme already existing in developed economies like France, UK, etc].

The growth process should be widespread as well as sustained.

It Is Business with Social Onus after All

A credit-plus mechanism could help repay the loans easily. No one can dwell better than banks on inclusive growth and as such the crucial need is there to percolate intensively among the poor. It is to be kept in mind that even though the GDP growth rate was 7 percent, yet the rural economies recorded only a palpable 2 percent! So, the incidence of regional imbalance does not narrow down.

It should not be forgotten that banks are one of the wheels of development- other wheels have to move simultaneously (viz. rural electrification, marketing, storage, communication, technical consultancy, etc.). Otherwise lower rate of growth would go on repeating just. A crucial need is there to implement farm modernization programmes as well as bolstering productivity, efficiency and profitability. Land use dimensions call for a new look. Simply asking the banks to double the flow of credit to the agri-sector is necessary but not sufficient, obvious enough! Government’s efforts are definitely on but a scientific updated approach is urgently awaited.

The ultimate thing remains – how the recovery of loans takes place – the path of recycling of funds is made smooth and widened. There is exactly nothing known as free lunch! Banking is a business venture too!

Let us keep our fingers crossed and hope that Banking sector seizes the opportunity to bolster business in the rural counterpart as well.