Why should bank open in rural area?
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bank should be opened in rural areas because the people there cannot afford to go to the city and solve their issues. so, it would be very helpful to open banks in rural areas
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Higher business per branch, better technology and low-cost banking channels like business correspondents will help public sector banks swing their rural operations into profit within the next five years, Crisil Research, an arm of rating agency Crisil Ltd said in a report on Monday.
“In the last five years, business per branch in the rural areas has grown at a compounded annual growth rate of 7% despite the overall branch network growing at 9% annually. The economies of scale are set to increase further in the years to come,” Crisil said in a report titled “Falling costs, technology tailwinds for rural banking.”
Indian banks must compulsorily open at least one-fourth of their incremental branches in rural areas; however, the high cost of operations in the rural areas mean that profit from this business is hard to come by so far, Crisil said.
However, going ahead, as these branches develop economies of scale, increase use of technology and use low-cost channels like banking correspondents, profits will start coming in.
“The economies of scale are set to increase further in the years to come. A case in point is the recently launched Pradhan Mantri Jan Dhan Yojana (PMJDY). While this poses challenges for banks in the short term, in the longer term, it would augment business per branch,” Crisil said in its report.
The PMJDY is a nationwide scheme aimed to ensure a bank account for every Indian, which will help increase access to credit.
Crisil estimates that the cost per transaction in rural branches is Rs.100-110, higher than the Rs.70-85 it costs per transaction in non-rural areas. However, business correspondents who operate with hand-held devices or through small stores in rural areas, enables a transaction at a fifteenth of the cost of a branch at Rs.5 or Rs.7, Crisil said.
“However, business correspondents are currently used mainly for liability-based transactions (deposits and payments related). They currently contribute to 8-13% of total liability-based rural transactions and the proportion could well touch 25-30% in the next few years. Moreover, corporate business correspondents, who have turned profitable with increased scale, are aggressively looking at expansion,” Crisil said.
The rating agency said that for most business correspondents in rural areas, this business is typically a side business. “They are either grocery shop or STD booth owners, or farmers who are also members of a panchayat; and so, the compensation given to them by banks or corporate business correspondents is not their only source of income. Thus, the model can be sustainable even though the remuneration is relatively lower,” the rating agency said.
“In the last five years, business per branch in the rural areas has grown at a compounded annual growth rate of 7% despite the overall branch network growing at 9% annually. The economies of scale are set to increase further in the years to come,” Crisil said in a report titled “Falling costs, technology tailwinds for rural banking.”
Indian banks must compulsorily open at least one-fourth of their incremental branches in rural areas; however, the high cost of operations in the rural areas mean that profit from this business is hard to come by so far, Crisil said.
However, going ahead, as these branches develop economies of scale, increase use of technology and use low-cost channels like banking correspondents, profits will start coming in.
“The economies of scale are set to increase further in the years to come. A case in point is the recently launched Pradhan Mantri Jan Dhan Yojana (PMJDY). While this poses challenges for banks in the short term, in the longer term, it would augment business per branch,” Crisil said in its report.
The PMJDY is a nationwide scheme aimed to ensure a bank account for every Indian, which will help increase access to credit.
Crisil estimates that the cost per transaction in rural branches is Rs.100-110, higher than the Rs.70-85 it costs per transaction in non-rural areas. However, business correspondents who operate with hand-held devices or through small stores in rural areas, enables a transaction at a fifteenth of the cost of a branch at Rs.5 or Rs.7, Crisil said.
“However, business correspondents are currently used mainly for liability-based transactions (deposits and payments related). They currently contribute to 8-13% of total liability-based rural transactions and the proportion could well touch 25-30% in the next few years. Moreover, corporate business correspondents, who have turned profitable with increased scale, are aggressively looking at expansion,” Crisil said.
The rating agency said that for most business correspondents in rural areas, this business is typically a side business. “They are either grocery shop or STD booth owners, or farmers who are also members of a panchayat; and so, the compensation given to them by banks or corporate business correspondents is not their only source of income. Thus, the model can be sustainable even though the remuneration is relatively lower,” the rating agency said.
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