The Last Frontier

Less than an hour’s drive south from Nashik is the semi-urban area known as Deolali Camp. Murlidhar Karanjkar, a soya bean farmer, has pedalled some 20 kilometres there from Nashik in the hot afternoon sun. The peasant is heading back to his village, Bhagur, also the birthplace of freedom fighter Vinayak Savarkar.

Karanjkar cuts a striking figure on his bicycle, his white cap, dhoti and kurta contrasting starkly with Maharashtra’s dry red landscape. Ignoring the honking twoand three-wheelers in Deolali’s main bazaar, he parks his beat-up old bicycle outside a two-storeyed office building, which houses a few bank branches, a coffee shop and a call centre.

Established in the 1860s as a camp for British troops, Deolali is today home to some 120,000 people. Locals call it ‘mini-Dubai’, because villagers sometimes come here seeking imported goods, branded clothes, jewellery – and banking services.

Karanjkar, who stands under five feet, seems tired from his bicycle ride, but walks purposefully into a 1,500 sq. ft. ICICI Bank branch, which is open on weekdays from 9 a.m. to 6 p.m. The cool, air-conditioned room smells of room freshener – a far cry from public sector bank branches aired by ceiling fans. The room is bustling with smartly dressed bankers in their late twenties, all locals.

The 72-year-old ICICI Bank customer walks to the senior citizens’ desk at the far end, his smile showing the gaps in his teeth. The staff greet him by name in his native Marathi. Karanjkar is a gold loan customer. “Mee sonyachya jaagi paishe udhaar ghetle,”he says in Marathi. He borrowed`1 lakh last year at an interest rate of 13 per cent, by pledging the gold of his family of seven. What he liked most about the private bank, he says, was that his loan was cleared in half an hour –faster than the public sector Union Bank of India, where he first became acquainted with banking four years ago. Sure, the local moneylender in Bhagur would have been even faster, but the interest would be between 24 and 36 per cent.

ICICI Bank, the country’s second largest bank in terms of total assets, made its debut in Nashik district in 1997. For more than five years, it had just one branch, in Nashik city. Now there are nine spread over the district. “This year, we plan to add seven branches,” says Amol Kohli, Regional Head(North Maharashtra).

Kohli, a Punjabi who speaks fluent Marathi, is echoing the push of banks into the hinterland. In the next 10 years or so, say senior bankers, Indian banking will see a big shift to semi-urban and rural areas (see Shifting Sands). The initial prod in this direction came from regulatory targets for agricultural and financial inclusion. “This has transformed into a business proposition,” says S.K. Chakrabarti, Deputy Managing Director at Axis Bank, a lender that counts as many of semi-urban branches as in the cities. The economic slowdown of 2008, in no small measure, showed banks the risk of a high exposure to customers in cities and the need to diversify portfolios. (A rural centre is a place with less than 10,000 people counted by the 2001 census, while a semi-urban one has 10,000 to 100,000 people.)

Rajiv Sabharwal, Executive Director, ICICI Bank, says rising agricommodity prices mean higher incomes in rural areas. Besides, there are new employment opportunities in sectors such as fast-moving consumer goods, pharmaceuticals and insurance.“The availability of banking products has increased in the past couple of years,” he says. He adds that cash payment of subsidies to farmers and people below the poverty line will be a big opportunity for banks. Subsidies on LPG, kerosene and fertiliser are estimated at more than `70,000 crore annually.

The banking regulator, by all indications, will continue its benign policy support for banking for hitherto unbanked areas. A draft report of the Reserve Bank of India, or RBI, on granting new banking licences to non-banking finance companies, or NBFCs, requires them to set up 25 per cent of their branches in semi-urban and rural areas. Also, draft guidelines on foreign banks would let them not only convert branches into wholly owned subsidiaries, but also operate freely in small cities and towns.

Banks are doing well in small cities, meanwhile. IndusInd Bank’s FM Circle branch in Balasore, Orissa, broke even in just four months, as opposed to the usual 12 to 18 months. “That was a wake-up call,” says a beaming Romesh Sobti, Managing Director and CEO of the bank. He heaped questions on IndusInd’s consumer banking head to figure out what went right. The bank is now replicating the Balasore model in other places. “The trick is local flavour,” says Sobti, a votary of recruiting locally.

However, not all semi-urban and rural areas are likely to be lucrative. “Some centres are specifically targeted for financial inclusion,” says Paresh Sukthankar, Executive Director, HDFC Bank. Axis Bank, the country’s third largest private sector bank in terms of assets, calls its expan- sion plan, formulated about two years ago, its ‘Bharat’ strategy. There is a sea change in banks’dealings with these new customers. Only five years ago, the focus was on mobilising low-cost deposits and selling a few products– a crop loan here, a tractor loan there. But now, rural and semi-urban customers can get the whole nine yards. “It’s relationship banking, just the way we do it in the metros,” says Sabharwal of ICICI Bank. His branch manager at Deolali, Kiran Patil, goes twice a month to the dozen or so villages in the area to meet farmers in gram sabhas.

Some semi-urban and rural customers are showing interest in insurance products, and even investment options such as mutual funds. HDFC Bank’s Sukthankar says the increase in insurance policies sold through semi-urban and rural branches is astounding: the share has gone up from one per cent to more than 10 per cent in a couple of years. For a bank, selling investment products means a steady fee income without dipping into its capital.

Seen in this perspective, semi-urban Deolali, with nearly a dozen banks, is not exceptional; it is part of a trend. Near Karanjkar’s ICICI Bank branch, there are four other private banks: Axis Bank, DBS Bank, HDFC Bank, and HSBC. Then there are public sector banks. If there is a worry, it is possible overcrowding in the next five to 10 years.

The hinterland has its own set of challenges (see Tough Terrain). Customers here are more debt-averse than their urban counterparts. Many already own a house. They live in joint families. They do not have a flashy lifestyle. Those who have a lot of money – rich farmers, mostly – prefer to pay cash, even for a big car.

Several public sector banks have been making losses in rural and semi-urban branches. While an urban or a metro branch offer the opportunity to sell multiple products, there is a saturation limit for branches in small towns with a population of a few thousand people.“People there are not ideal customers for all financial services and products,” says theCEO of a small private bank.

The big competition for private sector and foreign banks will come from niche NBFCs – potential banks – especially in big products such as loans against gold. Today, NBFCs such as Manappuram Finance and Muthoot Finance dominate gold loans, and Mahindra Finance leads in tractor finance in small towns and cities.

“It’s going to be competitive, but not tough,” says Sukthankar of HDFC Bank. “In the mid-1990s, when new-generation private sector banks arrived on the scene, everybody said the metros were saturated. Today, some of those private banks, such as ICICI, HDFC and Axis are among the top five players.”

Many private sector bankers argue that banking must be seen as part of the opportunities emerging in the hinterland. “Commercial banking doesn’t lose its colour,” says Axis Bank’s Chakrabarti, who has more than three decades of experience in the business. “The trick is to keep deepening the relationship with customers,” says ICICI Bank’s Sabharwal.

A fast-expanding network of so-called business correspondents – people like petrol station owners, retailers, or others authorised to offer banking services – as also mobile phonebased banking, both of which reduce the cost of taking banking to remote areas, too, will increasingly give a fillip to the reach of banks into the hinterland.

Many also argue that, with financial services reaching the poor, the cash economy will gradually give way to banks. Many villages today have no access to banking. “The availability of banking services will accelerate the overall economic development of small towns and villages,”says Sukthankar.

That would set off a virtuous circle: if banking and financial services grow, people will get cheap funds to buy houses and cars, or to start or expand a business, and if that happens, banking will grow. And the face of that change is Karanjkar, with his gap-toothed smile.