The Hindu Business Line : Rural branches no drain on banks

IT is generally believed that rural business is a losing proposition for banks and it is only Government diktat that is forcing them to maintain branches in the country's hinterland.

This perception is also strengthened by the fact that between March 1994 - which is roughly around the time when financial sector reforms began - and June 2003, the total number of rural branches of scheduled commercial banks has fallen from 35,329 to 32,381.

Further, of the 32,381 rural branches as on June 30, 2003, public sector banks (including regional rural banks) accounted for 31,243 or 96.5 per cent. On the other hand, Indian private sector banks operated only 1,138 branches, while there was not a single foreign bank that had an office in rural areas.

The fact that the number of rural bank branches have come down by nearly 3,000 over the last 10 years - even while those in urban areas and metros have increased by 1,905 and 2,809, respectively - is said to be proof that, given a chance, banks would like to exit from rural areas.

The belief that rural business means losing money has also been reinforced by the extent of fall in bank stocks heavily in today's trading at the Bombay Stock Exchange, led by SBI (4.86 per cent), Bank of Baroda (5.36 per cent), Canara Bank (3.79 per cent), Union Bank (3.15 per cent) and UCO (3.15 per cent). This followed the Government's announcement last Friday that banks would enhance their agricultural lending by 30 per cent during this fiscal.

But a glance at the accompanying Table shows that operating rural branches is not a banker's nightmare, as it is often assumed. First of all, rural areas generated about 13.8 per cent of the outstanding deposits of scheduled commercial banks as on March 2003.

But what is more important is that the total sums mobilised as deposits (Rs 176,269 crore) is way above the aggregate sum lent out (Rs 74,776 crore).

What this means is that far from being a drain on their resources, rural areas provide funds for banks far in excess of what they receive in turn as credit. According to Dr N.K. Thingalaya, former CMD of Syndicate Bank, the difference between deposits and credit (around Rs 101,500 crore) actually represents a net siphoning of savings from the countryside to urban centres and metros.

Dr Thingalaya also contends that the cost of funds for banks from rural deposits is lower than that in urban areas. "This is because that rural people generally tend to maintain money in savings bank accounts for longer periods than in cities, where the bulk of deposits come from salaried sections, who tend to withdraw money more frequently. As a result, rural areas are sources of low cost, long period savings for banks and just for this reason, it makes economic sense to operate branches there," he points out.

In fact, since the average cost of funds for banks in rural areas would work out to hardly 5 per cent, they can easily lend to the farm sector at competitive rates, if they have the will to do so.

Unfortunately, this does not seem to be the case. The credit-deposit ratio in rural and semi-urban areas ranges from 35 to 42 per cent, as against 83 per cent in the metros. Banks have no problems in making car loans, even if the collateral is restricted to just the vehicle.

But when it comes to the purchase of a tractor, banks insist on the farmer mortgaging his land as well. This is despite the fact that the useful life of a tractor is typically more than that of a car.

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