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Banking industry's apartheid
Tamal Bandyopadhyay
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August 11, 2005

Last week, the Reserve Bank of India [Get Quote] asked commercial banks to chalk out their branch expansion strategies "keeping in mind the developmental needs of unbanked regions and potential for growth available across the country".

The directive, addressed to the chief executives of all scheduled commercial banks, excluding the regional rural banks, also included a list of underbanked districts and states. The list mentioned 391 underbanked districts with population per branch more than the national average of 16,000.

Among the states and union territories, Goa and Chandigarh did not find any mention in the list, while Kerala, Punjab and Sikkim have only one underbanked district each. Uttar Pradesh has the maximum number of underbanked districts (63), followed by Madhya Pradesh (43) and Bihar (37).

Even some of the well known pockets on the political map of the country such as Madhepura, Rai Bareli, Allahabad, Etawah, Warrangal, Tinsukia, Baghpat and Pilibhit are underbanked. Politicians have often been blamed for the piling non-performing assets of the banking industry.

In the past, some of them may have influenced banks' decisions in loan disbursements, but they have failed in wooing the commercial banks to open shops in their constituencies.

In 1969, when the first set of banks were nationalised, there were 89 scheduled commercial banks with 8,262 branches across the country. In March 2004, the number of scheduled commercial banks grew to 290 and the branch network to 69,071.

Naturally, the population covered per branch, which was 64,000 in 1969, dropped drastically to 16,000 in 2004. This is, by any yardstick, no mean achievement. However, if one looks at a shorter time-frame, the picture appears very different.

In March 1997, there were 65,562 branches and the population covered per branch was actually lower than what it is today -- 14,000. Why has this happened? For two reasons: the growth in population has been higher than the growth in branch networks; and the incremental growth in branch networks is totally concentrated in metropolitan and urban centres and rural India actually witnessed a shrinkage in branch networks.

In March 1997, there were 32,939 rural branches, which dropped to 32,227 in 2004. On the other hand, the number of metropolitan branches went up from 8,390 to 9,750 during this period.

So much for the rural-urban divide. There is a division among states too. A look at the branch expansion strategy of commercial banks over the past 10 years -- between 1995 and 2004 -- will show how some of the states have been pampered while others overlooked.

For instance, Chandigarh had 151 bank branches in 1995. In 2004, the number jumped to 218 registering over 44 per cent growth. Delhi housed 1,256 branches in 1997 and 1,639 in 2004, a growth of over 30 per cent.

Haryana and Punjab, too, feature in this category. In Haryana, there were 1,358 branches in 1997, which went up to 1,640 in 2004 (close to 21 per cent growth) and Punjab had 2,298 branches in 1997, which grew to 2,700 in 2004 (a 17.5 per cent growth).

Some of the southern states, too, caught the attention of bankers. For instance, Karnataka got 456 new branches in these five years, Andhra Pradesh got 493 and Kerala 305.

In western India, Maharashtra witnessed the maximum number of branch opening in these five years -- 565 or over 9 per cent growth. In sharp contrast, Uttar Pradesh actually saw a decline in the number of branches. Ditto for Bihar and Madhya Pradesh.

Even if one looks at the combined branch network in Uttaranchal and Uttar Pradesh, Jharkhand and Bihar, and Chattisgarh and Madhya Pradesh, the increase in bank branches in these states is nominal. The entire north-east -- Tripura, Assam, Nagaland, Arunachal Pradesh and Manipur -- too experienced a downsizing of bank branches.

There is yet another dimension to the imbalance story. Maharashtra accounts for 21.3 per cent of the total deposit portfolio of the banking system but its share in the credit pie is 29.5 per cent. Uttar Pradesh, on the other hand, contributes 7.9 per cent of the deposits but gets only 4.4 per cent share in the credit kitty.

Similarly, Bihar's national share of deposit mobilisation is 2.4 per cent but when it comes to credit, it accounts for only 1 per cent of the country's credit market. Two southern states, Andhra Pradesh and Karnataka, and Chandigarh and Delhi in north, too, have small shares in the deposit portfolio but higher share in the credit pie.

This imbalance can only grow as the entire credit market is now driven by consumer loans where rural India has virtually no role to play. At the moment, the Indian consumer loan segment is the fastest growing financial services market in the world and, believe it or not, 20 cities account for the 80 per cent of the new asset creation.

So, by merely drawing attention of the banks to the "developmental needs of unbanked areas", the RBI will not be able to bring them to the rural turf.

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