How Technology Can Make Rural Banking Profitable
Opening rural branches and running them profitably are becoming a huge burden on public sector banks with the sharp increase in the operational expenses. However, banks need to remain profitable to stay afloat. In such a turbulent state, efficient use of technology and low-cost banking channels will help public sector banks in India turn their rural operations into profit in the next 5 years, states Crisil Research.
The research reveals that in the last five years, business per branch in the rural areas has grown at a compounded annual growth rate of 7 percent despite the overall branch network growing at 9 percent annually. The economies of scale are set to increase further in the years to come, says the report, giving example of the recently launched Pradhan Mantri Jan Dhan Yojana (PMJDY), which is a nationwide scheme aimed to ensure a bank account for every Indian, which will help increase access to credit.
According to the research and rating agency, Indian banks must compulsorily open at least one-fourth of their incremental branches in rural areas. However, the high cost of operations in rural areas mean that profit from this business is hard to come by until now. The research says that going ahead, as these branches develop economies of scale, increase use of technology and use low-cost channels like banking correspondents, profits will start coming in.
Crisil sees a lot of potential in technologies such as cloud computing, mobile and virtualization alongside low-cost channels such as business correspondents who augment business per branch in the coming months. Crisil researchers estimate that the cost per transaction in rural branches is Rs.100-110, higher than the Rs.70-85 it costs per transaction in non-rural areas. However, business correspondents who operate with hand-held devices or through small stores in rural areas, enables a transaction at a 15th of the cost of a branch.
While business correspondents are currently used mainly for liability-based transactions such as deposits and payments related ones and contribute to 8-13% of total liability-based rural transactions, the proportion could well touch 25-30% in the next few years, says Crisil.
At present, however, for most business correspondents in rural areas, this business is typically a side business. “They are either grocery shop farmers who are also members of a panchayat; and so, the compensation given to them by banks or corporate business correspondents is not their only source of income. Therefore it sees that the model can be sustainable even though the remuneration is relatively lower.
Crisil estimates that the number of transactions through banking correspondents will increase to 752 million by fiscal 2018-19 up from 329 million in fiscal 2013-14 as cost of transactions fall.
By 2018-19, the report says that rural banking will outpace overall business growth with economies of scale bringing about a reduction in the overall operational costs.
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