Rural Banking: Need to Bolster Speed and Stability

Dr BK Mukhopadhyay

A noted management economist and an international commentator on business and economic affairs. He may be reached at m.bibhas@gmail.com

Rural banking has been gaining ground through SHG / SGSY group formations, bank linkages, financial inclusion as well as 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 target now is: 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 deposit 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, have been witnessing significant credit growth. Banks were also asked by the regulators to rebalance the portfolios to make sure that the productive sectors, agriculture, in particular , are not deprived of 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. For economies like India 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. True, there has been a convergence in the business interest of the banking community in financial inclusion. 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. 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 corporate have already steadily getting disintermediated 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’ [already existing as well in developed economies like France, UK, etc].

Still, to bring the farmers under the ambit of financial inclusion the increasing role of commodity exchanges in the matter of providing forward market linkages and price discovery is being largely felt. This very process could succeed if banks and exchanges work together. Active market support providing is what is urgently awaited. Side by side, banks and financial institutions which have been intervening in the forex as well as in the stock markets now need to extend active participation in commodities market. Introducing specialized financial products and reach out to farm households with holdings of less than one hectare could definitely extend the outreach. The growth process should be widespread as well as sustained.

Micro-approach Essential

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 per cent, yet the rural economies recorded only a palpable 2 per cent! 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. 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!

Business with Social Responsibility

Business processes must become more mature and the Institution must be able to deliver higher performance-spatially, temporally, hierarchically and functionally. Obviously, to achieve the same the starting point is designing [the comprehensiveness of the specifications as to how the process is to executed]; followed by the performers [people executing the process based on skill and knowledge]; owner [persons shouldering the responsibility for the process as well as the results]; infrastructure [information/MIS that support the process]; and of course the metrics [the measures the company uses to track the process’s performance].

Boosting of service quality, keeping in view the very nature of effective demand, is the crying need. Quality refers to summing up cost and time. Changing any one of these variables would lead to change the outcome. If the amount of time is shortened to complete the assignment, either the cost is to be increased or quality is to be lowered. Quality refers to identifying the quality standards relevant to the assignment and determining how to measure and satisfy them.

The challenge, therefore, remains threefold: acquiring the right technology, deploying it optimally and remaining cost-effective whilst delivering sustainable returns to shareholders. Thus, managing technology so as to reap the maximum benefits remains a key challenge for the Indian banks.

Training, monitoring and other supporting services should tackle change management aspects and banks have to assume higher updated responsibilities in the arena of extending technical assistance, ably backed by monitoring and evaluation throughout the entire process, which, in turn, could help promote the building of sustainable micro-level associations and of self-help-groups, so that these associations in the course of time, will be able to take over functions which are related to planning and to technical assistance (decentralization).

Obvious enough: it’s a tough job for which systematic planning by the real knowledgeable planners [and not the so-called micro-expert having low-level knowledge and poor analytical skills] who could effectively make use of regional planning techniques.

Finally, conventional studies on rural societies, at least in the area of development studies, have tended to analyse roles of communities by perceiving a rural community as an organization. This perception is definitely useful when focusing on only one economic activity, i.e. agricultural production. New approaches must be sought to evaluate multi-functional roles of communities in analysing today’s complex socio-economic situations in rural areas.

Financial world today has to count on the fast-changing rural-urban business environment.