Private, foreign banks make a beeline for smaller towns

Private and foreign banks are rushing to set up branches in Tier-II and Tier-III centres following a boom in small and medium enterprises (SME). Public banks already have a presence in these centres.

Rising income levels driven by strong agricultural growth has forced banks to tap these markets, said G V Nageshwar Rao, managing director and chief executive officer, IDBI Bank.

With the increasing competition in metros, margins earned by banks on retail assets have dipped drastically and, hence, banks are looking at untapped markets, said Suresh Pai, executive vice-president, IndusInd Bank. In smaller centres the establishment cost is comparatively low.

Foreign banks are feeling threatened as private banks spread their presence into such towns. Expanding into these towns has become important as banks are moving away from financing traditional industries to new ones such as pharmaceuticals and BPOs.

"The challenge today is to be in those cities where dealers and suppliers are located in view of the paradigm shift in business opportunities," said Sanjay Nayar, Citibank CEO India and area head Bangalore, Nepal, and Sri Lanka. Citibank is thus keen on the subsidiary route to expand its reach into such towns.

Banks are exploring tier-II and tier-III centres mainly because they can now justify their cost of operations in these centres on the back of growing business potential.

The business potential in these centres is increasingly attractive as customers are looking for newer investment products and modern banking services, he added.

IDBI Bank is looking at a mixed strategy. "We plan to increase our density in metros and will also enter tier-III markets where the bank sees business potential," Rao said.

Tier-III markets where the bank will establish new branches include Moradabad, Panipat and Bikaner in north; Kolhapur and Nashik in west; Erode, Tripura, Kakinada and Rajahmundry in south; Gangtok and Guwahati in east.