Rural banking: 'Jan Dhan may help PSBs break into profits'

Higher business per branch and the business correspondents model may help public sector banks become profitable in rural areas over the next five years, driven primarily by ongoing Jan Dhan scheme, says a report.
Rural branches have been logging in 7 per cent growth in the past five years, while branch expansion by state-run banks was growing at a compounded annual rate of 9 per cent during the same period, as per the report which added that ongoing Jan Dhan scheme will be the trigger for profitability.
"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 the next five years," Crisil said in the report here today.

It said the newly-launched Jan Dhan scheme is likely to increase the economies of scale in the years to come. While the Jan Dhan scheme poses challenges for banks in the short-term, in the longer-term, it would augment business per branch, it said.
The Jan Dhan Yojana, the brainchild of PM Modi, aims at eradicating financial untouchability by providing bank accounts to the poor.
Crisil said as for private banks, rural operations are mildly profitable already, generating a tenth of their overall returns, and the situation will get even better.

Rural banking was shunned by banks because of the unfavourable economics involved in the model and they started implementing only in the last decade or so under regulatory and policy compulsion.

Crisil said during the last five years, business per branch in rural areas has grown at a compounded annual growth rate of 7 per cent, despite the overall branch network growing at 9 per cent annually.
Banks are also bringing down operating expenditure and expanding rural reach by experimenting with smaller branches and increasingly using BCs, as per the report.
Going forward, more such models are expected to be adopted, leveraging technology, it said.
"Improvement in technology and favourable regulations have made it possible for banks to service their rural customers through business correspondents at about a 15th of the cost of a rural brick and mortar branch, which is about Rs 100-110 per transaction," Crisil senior director for industry and customised research Prasad Koparkar said.

"We expect 25-30 per cent of liability-side transactions in rural areas to be routed through BCs by FY19, up from 8-13 per cent currently," he said.
The report further said the asset quality will also improve as credit bureaus and research agencies penetrate deeper into the countryside, and as economic growth picks up.