Financial Services for the Non-banking Population of India (Part - I)

Disclosure: I do not hold any positions in the stocks mentioned in this article and not planing to initiate any in the next seven days. The views expressed in this article are my own.

Financial services are an integral part of human life in this modern, competitive world. It is difficult to imagine a society today without access to lending and other financial services and products. Access to financial services and products gives us the opportunity to meet current living requirements and to safeguard the future. An absence of these services increases the risks and costs of a person’s well-being.

In India, 40% of the population is living without access to financial services. The Reserve Bank of India has set the stage to widen the reach of financial services to more people as part of its financial inclusion programme. To achieve this objective will require at least next five years.

This goal can be better achieved with the help of private, and state and central government-owned banks. But until recently, private banks have wanted to focus on metro and urban areas where the growth opportunities are abundant, as opposed to rural, poorer areas. But now, because of extreme competition between private banks in urban areas over the past ten years, the market has become too crowded. The scale at which these private banks provide services to customers in these locations has declined significantly, making it difficult to earn higher profits. In addition, the boom in the real estate market in rural areas has increased their growth rates, thus attracting private banks.

The growth in rural consumption has outpaced the consumption of urban populations, and it is expected that this trend will continue in the near future.

“Rural consumption per person has increased by 19 per cent yearly between 2009 and 2012; two percentage points higher than its urban peers. In incremental terms, spending in rural India during this period, increased by US$ 69 billion, significantly higher than US$ 55 billion by urban populations.”

                                                                                                                                             Source: IBEF

As a result, private banks are broadening their focus to these rural areas and have opened many new branches in rural locations.

                                                                                                                      Source: ICICI Bank

The rural branch network of ICICI Bank Ltd (IBN) has nearly tripled within two years, while in urban areas the branch network has hardly increased at all.

The situation is similar at HDFC Bank (HDB). Its rural branch network as a percentage of the total branch network has more than doubled within three years.

One of the first and foremost challenges for private banks starting operations in rural areas comes from government-owned banks that have traditionally dominated the rural market. In particular, the State Bank of India is synonymous with banking in rural India. Breaking this dominance is a great battle for the private banks. But the quality of services that these private banks provide will override the long presence and relationship that the State Bank of India has with rural areas.

Concentration on unbanked population

This new focus on the rural market also extends to many villages (communities with populations less than 2000) by these private banks through different initiatives as part of financial inclusion programmes, like Branch on Wheels by ICICI bank and Sustainable Livelihood by HDFC bank, where opening up a branch is not viable. However, is it possible for these banks to make profits within three to five years from their operations in rural Indian villages? Read part -II of the article here.