11 December 2019

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Why Banks are Reluctant to Come to Rural Entrepreneurs

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India’s banking sector has been flourishing with a rising economy and a large population base. The same cannot be said for rural and semi urban centers. India has one of the poorest statistics when it comes to offering banking services to the rural centers. The Reserve Bank of India (RBI) on its part acknowledges the lack of rural penetration and its towing with the idea of making a new rule making it mandatory for new banking licensee’s to have one fourth of their total banking branches in rural centers. The idea of converting Indian postal department as a full fledged bank with its wide range of branch connectivity in rural areas is also a step in the same direction.

When RBI gave permits to 10 private banks in 1994-95 and another two in 2003-04, it made is mandatory for the banks that 40% of their loan portfolio needs to be offered to the priority sector as the rural areas have been named. Even with the mandatory lending rules, banks have failed to offer any substantial loans to the people living in rural areas of the country compared to urban centers. Let us take a deep insight as to why both public sector and private banks have been reluctant in offering banking services in rural centers of the country.

The Dark Reality of How Banks Fulfill Priority Sector Norms: The real dark underbelly of the Indian banking sector is that most of the private and public sector banks try and camouflage these norms by buying out loans from non banking financial institutions rather than directly lending to small farmers and other rural consumers.

ICICI Bank and HDFC Bank, two of the country’s leading private banks have witnessed a substantial decline in the rural lending. ICICI bank's rural loan book has witnessed a decline of nearly Rs 2,000 crore in the last three to four years while HDFC bank's farm loan has grown marginally over the same period. Public sector bank's on the other hand have been offering a large chunk of loans in rural areas with State Bank of India and Punjab National Bank doubling its farm loan exposure in the last three to four years.

RDIF making up the Numbers: The government on its part has fixed minimum loan criteria all banks must adhere but it seems that banks are offering rural loans forcefully. Instead of offering real loans to the weaker economic sections of the society living in rural area, banks have now started to make up their numbers by investing in rural infrastructure development fund (RIDF) of the National Bank for Agriculture and Rural Development (NABARD). Ever since RDIF scheme has been launched in 1995, NABARD has loaned around Rs.1.2 trillion from RIDF to state governments. Simply speaking the banking organizations including private as well as public sector banks have failed to offer any real rural support for loans and offering other banking services.

Dampening Revenues in Rural Centers: India's rural banking penetration is quite dismal compared to a lot of developing nations. According to experts, only 30,000 of the 600,000 villages in India have a commercial bank branch which leads to only seven branches per 100,000 adults. While the rule that banks need to have one fourth of 25% of their total working branches in rural areas has been around for some time, experts feel the problem lies in the high operating costs. Not many bank employees prefer a rural stint. The absence of big lending activity also makes it tough for banks in rural centers to have any meaningful revenues. Another damper in the rural banking sector is the inability of all banks including public and private banks to open up other areas of revenue like risk covers.

Higher NPA's in Rural Centers: Another big deterrent for all banks that fails to attract them towards rural areas is the rising amount of Non-performing assets (NPAs). Even State Bank of India, the country's biggest public sector bank has witnessed three quarters of negative growth due to a high number of Non-performing assets (NPAs). A large part of these Non-performing assets (NPAs) come from rural and semi urban centers. Rather than bleeding because of a disproportionately higher amount of non-performing assets, banks try and fill their 40% quota through RDIF and financing of non banking financial institutions.



0 #1 masood 2014-12-08 11:18
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