For public sector banks, much-awaited rural-banking profit nears reality

In a classic case of adversity turning into opportunity, rural banking – shunned by banks because of the unfavourable economics involved and implemented only in the last decade or so under regulatory and policy compulsion – is gradually set to become a gainful pursuit.

According to a study by Crisil Research, increasing economies of scale (with higher business per branch) and usage of low-cost channels such as business correspondents (BCs) will help public sector lenders, who are currently incurring losses in their rural operations, to turn in profits over a five-year timeframe.

As for private banks, rural  operations are mildly profitable already, generating a tenth of their overall returns.

Indications are the situation is changing already. In the last five years, business per branch in the rural areas has grown at a compounded annual growth rate of 7 per cent, even as the overall branch network has been growing at 9 per cent annually.

The economies of scale are set to increase further in the years to come. A case in point is
the recently launched Pradhan Mantri Jan Dhan Yojana. While this poses challenges for banks in the short term, in the longer term, it would augment business per branch.

Banks are also bringing down operating expenditure and expanding rural reach by experimenting with smaller branches and increasingly using BCs.

Going forward, more such models are expected to be adopted, leveraging technology.

Says Prasad Koparkar, senior director, industry and customised research, Crisil Research,
''Improvement in technology and favourable regulations have made it possible for banks to service their rural customers through business correspondents at about a fifteenth of the cost of a rural brick and mortar branch, which is about Rs100-Rs110 per transaction. We expect 25-30 per cent of liability-side transactions in rural areas to be routed through BCs by 2018-19, up from 8-13 per cent currently.''

He says rising scale and reduction in costs will drive down the or operating expenditure as a proportion of average funds deployed – of the rural branches of lenders, which is as high as 1.6 to 2.0 to times that of non-rural branches, to 1.3 to 1.4 times by 2018-19.

Asset quality will also improve as credit bureaus and research agencies penetrate deeper into the countryside, and as economic growth picks up. These factors will help ratchet up profitability, he adds.

Says Ajay Srinivasan, director, industry research, Crisil Research, ''We see the rural business of PSBs turning around by the end of 2018-19, with return on assets (RoAs) turning a positive 0.3-0.4 per cent because of lower operating expenses and better asset quality.

"For private sector banks, which are already making money from their rural business, things will improve further. Yet rural profitability will at best reach a third of the non-rural profitability by that year. That leaves scope for further improvement.''