In 2005, the Government of India took the initiative of restructuring the rural banking sector. Through the process of mergers, the number of regional rural banks was reduced from 196 to 84, without much ado. As a result of this measure, the viability of many of them has improved and the number of loss incurring banks among them has come down.

The final destination of rural banking is not merely improving the viability of gramin banks. It has to be much more than that. A vibrant and sustainable rural banking structure has to be evolved with a long term perspective, which can make total financial inclusion a reality. It has to be designed to take care of this aspect as a part of its functioning and not as a knee-jerk response to a dictate from the regulator. Against this background, should the commercial banks continue to operate in rural India? This question arises in the context of the expediency of making our banks internationally competitive.

Commercial banks' rural business

Rural banking in India has been a great hurdle race ever since the government nationalised major commercial banks and directed them to go to the villages. The directive was not merely about barefoot banking, but to run into unfamiliar terrain to establish their flag posts. The players were untrained and mostly unwilling to participate in the marathon. Their captains were equally unprepared. Only the umpire was stubborn and unrelenting. He brought more players into the race, changed the rules of the game many times. At some stage it appeared as if he himself had lost interest in the race. But the race continues, proceeding in different directions, because whoever occupies the umpire's chair cannot but subscribe to the belief that 'India lives in its villages'.

The reluctant debutantes in rural banking have reconciled to operating in the villages, not necessarily to live in the villages. While some of them have made remarkable contribution to the socio-economic development of the neighbourhood, many commute between the villages and the nearby towns. The personnel departments of some banks often find it difficult to post the staff willing to go to villages, though many of them hail from villages. The inevitability of rural banking makes it an integral part of banking policy.

The roadmap of financial sector reforms, however, has visibly bypassed rural banking. The barefoot bankers are accustomed to walk amidst the debris of some of the populist programmes scattered around. Many commentators have tried to explain graphically the progress made in the hurdle race, going on for the last four decades. But, there is very little analysis of the contribution of the rural banking business to the total banking business. As one associated with rural banking for decades, I am convinced that rural banking is not a losing proposition. The financial results of the re-organised regional rural banks for the financial year 2009 have proved this beyond doubt.

It is necessary to assess the contribution made by the rural branches of commercial banks to the total banking business. Since rural branches of commercial banks, especially of the public sector banks, excluding the regional rural banks, constitute nearly 35 to 40 per cent of the total branches, it is imperative to evaluate their contribution to the total business as well as to the total profits. Rarely do banks publish these details.

Karnataka - study of rural banking

Since it is not possible to make a study of the banking sector nor of any individual bank for want of relevant data, an attempt is made to assess the volume of business generated by the rural branches in one of the states, where rural banking is very prominent. The state selected is Karnataka. In the Table 1, the shares of rural business of the seven big banks, which have major presence in rural Karnataka, are analysed, based on the March 2009 data.

In Karnataka there are 4557 branches of all Indian banks, excluding those of gramin banks. Out of them, the share of the seven big banks is 65 per cent. Rural branches are1330, of which those of the seven banks are 1067. Though the other 19 public sector banks also have their presence in the state, their rural branches are only 109 and many of them do not have rural branches in the state. Private sector banks have only 154 branches.

Canara Bank has 40 per cent of its branches in the state operating in rural areas. Its contribution to the total deposits mobilised by the Bank in the state is only 11 per cent. In the case of credit deployed, it is 12 per cent. Syndicate Bank's rural branches (41 per cent) generate 14 per cent of its deposits in the state. In the case of Corporation Bank, only 9 per cent of the deposits originate from their rural branches in Karnataka. The contributions of the rural branches of State Bank of India and State Bank of Hyderabad to their total banking business in the state are much lower.

The inference…

Since the business volume generated by rural branches in the state is disproportionately lower than their share in the branch network, inferentially, their contribution to the total profit of the bank originating from the state, would be low. This inference could be true for the nationwide operations of banks also, other things being equal. Strategically therefore, should the banks continue to operate 40 per cent of their branches in rural areas to mobilise hardly 10 per cent of their resources or to deploy 10 per cent of their advances?

One plausible alternative would be to hive off the rural business by the seven banks to the gramin banks sponsored by them in the state. Their rural branches-1067 in number- can be hived off by merging them with the respective gramin banks in the state. Commercial banks can confine their business to the semi-urban areas, the urban areas and metropolitan areas, where the major parts of their business originate. The core competence of commercial banks is not rural banking. They are in rural banking business by compulsion and not necessarily as a business strategy. Given a choice, they would be happy to confine to urban business only, where they have higher stakes.

Future shape of rural banking

In Karnataka, there are at present six gramin banks sponsored by six out of the seven banks mentioned above. State Bank of Hyderabad does not have a gramin bank in Karnataka, while State Bank of Mysore and State Bank of India have one each. The rural business of State Bank of Hyderabad in the state may be merged with those of Cauvery Kalpatharu Grameena Bank, sponsored by State Bank of Mysore.

The sizes of the branch network, volume of business and profits of the six gramin banks operating in the state vary widely. All of them, however, are making profits. Karnataka Vikas Grameena Bank, sponsored by Syndicate Bank, has the biggest branch network- 419 branches as against Vijaya Bank's Visveshvaraya Gramin Bank having only 29 branches, huddled in a single district. In terms of the volume of business, Pragathi Gramin Bank, sponsored by Canara Bank, stands first- Rs.6247 crore, while Visveshvaraya Gramin Bank operates with very low volume of business of Rs.279 crore. Karnataka Vikas Grameena Bank makes a net profit of Rs.37 crore, the bottomline of Visveshvaraya Gramin Bank remains at Rs.0.22 lakh.

If the rural business of the seven banks is passed on to the six gramin banks, there would be a further improvement in the operational dynamics of these gramin banks. Their size of the business volumes would increase, as shown in Table.2

The resultant gramin banks would have wider network of branches covering the entire state, unlike the present situation, where they operate in selected districts. In the case of Krishna Gramin Bank, another alternative could be considered. The rural branches of State Bank of Hyderabad (33) could be tagged on to it besides the rural branches of State Bank of India in the state (52). Its size then improves to 197 branches, still remaining small. Another feasibility, which could be considered, is the merger of Cauvery-Kalpatharu Grameena Bank with Krishna Grameena Bank. The branch network of the latter would go up to 626.

Consolidate rural banking in three large gramin banks…

Through such mergers there would be some uniformity in their sizes, except in the case of the two smaller gramin banks sponsored by Corporation Bank and Vijaya Bank. Carrying forward the objectives of the process of mergers of gramin banks as initiated by the Government of India, the feasibility of merging these two banks individually to two of the bigger local banks may be examined. As a result of these mergers, Karnataka would have only three fairly big and stronger gramin banks, sponsored by Canara Bank, Syndicate Bank and State Bank of India.

Other public sector banks have 109 rural branches, which constitute about 12 per cent of their branch net work in the state. They generate hardly 3 per cent of the deposits and advances. Therefore, they may consider the feasibility of merging their rural branches with the three gramin banks.

As far as the private sector banks are concerned, except the two state-based banks, Karnataka Bank Ltd and ING Vysya Bank Ltd, other 11 banks have very little stake in rural business, having only 14 rural branches. Seven out of them do not have any rural branches in the state. These banks may be given the option of adopting the future course of action pertaining to rural banking. Instead of closing the small rural branches, they may consider the feasibility of merging them with the local gramin banks.

In sum...

What is presented above is an over-simplified model of the proposed rural banking structure for Karnataka. It is based on the available data pertaining to the operations of the banks in the state, both in rural and urban areas. More detailed analysis of the operational data is necessary to assess the contribution of rural banking business to the total profit of the banks. The data relating to branch-level profitability have to be analysed more critically. But, it is evident that the contribution of rural branches to the total business is disproportionally lower than their share in the total branch net work.

Banks are being directed to cover all the villages having a population of above 2000. In the light of the analysis of rural business made above, it is desirable that the Regulator should reconsider the policy of directing commercial banks to cover these villages. Gramin banks may be better suited for this task.