RBI talks inclusive growth, pvt banks need to roll up sleeves

The cost of banking is set to rise for private sector banks soon. They would now have to spruce up their expansion plans for rural India. A Reserve Bank of India (RBI) circular issued last Friday makes it mandatory for all scheduled commercial banks to have 25% of their new branches in rural India where banking services are not available. It’s no longer enough for banks to have mere representatives for rural areas. They need to open proper branches.

[caption id=“attachment_43093” align=“alignleft” width=“380” caption=“Opening a branch could be a lot less expensive in rural areas than urban centres and would generate a lot of current and savings account deposits for these branches. Reinhard Krause/Reuters”]  [/caption]

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The RBI has identified 72,800 villages with population over 2,000 that must be brought under the banking purview by March 2012. The RBI has defined ‘unbanked’ rural centre as one that does not have “a brick and mortar structure of any scheduled commercial bank for customer-based banking transactions”. The private sector banks will be hit harder compared to their public sector peers as these have only 6% of their branches in rural India.

Compare this to the State Bank of India group which has 35% of its branches in rural centres and nationalised banks that have 34% of their branches in rural areas. Krishnan ASV, analyst, Ambit Capital, had calculated a dip of 30 bps (100 bps is equal to 1%) in return on assets for banks from the current levels of 1.5% to 1.2% over 3-5 years. In fact, Krishnan expects the RBI to be aggressive in its branch approval policy, especially with private sector banks, to enforce financial inclusion.

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At present, all domestic scheduled commercial banks are allowed to open branches in tier 3 to tier 6 cities, with population up to 49,999, without RBI’s approval and subject to reporting to the central bank. However, in tier 1 and 2, with population above 50,000, these need RBI’s permission to open a new branch. The only exceptions are north-eastern states and Sikkim, where the permission extends to all cities.

While giving approvals, the RBI generally ensures that at least one third of branches opened in tier 3 to tier 6 cities, are in under-banked districts. It also assesses the bank’s participation in financial inclusion and priority sector lending.

Now that the banks will be required to open 25% branches in unbanked areas, it will not be compulsory to follow the mandate one third branches of tier 3-6 cities to be in under-banked regions. Now to get the permission to open branches in tier 1 and tier 2 cities, the RBI will see the commercial bank’s proposal to open 25% of total branches in unbanked regions.

The RBI has also decided on a scheme of incentives for the commercial banks. Over and above the 25% mandate they are supposed to follow, for every extra branch they propose to open in under-banked regions in under-banked states, they will receive approval for an extra branch in tier 1 city. This will be excluding the general approvals of tier 1 and tier 2 city branches that the RBI anyway gives, the conditions for which have been already discussed.

A banking analyst from a major broking firm said, “This could be a blessing in disguise for the commercial banks.” Till now, the banks were not very upbeat about expanding to rural areas, as it was economical for them to expand till they gathered strength in urban areas.

But now that the NBFCs are being kept out of the priority sector lending ambit, the rural branches could actually be crucial for commercial banks to meet the minimum percentage that they must lend to the priority sector.

Moreover, opening a branch could be a lot less expensive in rural areas than urban centres and would generate a lot of current and savings account deposits for these branches, which could keep costs of funds low for the concerned banks. However, the break-even period for a typical branch could go up to 15-18 months from 9-12 months in urban centres.