Rural branches of public sector banks (PSBs) could turn profitable in the next five years as lenders strive for economies of scale and ramp up low-cost channels, such as business correspondents, according to a report by research and ratings agency Crisil.
The report says private banks’ rural operations are mildly profitable, generating a tenth of their overall returns, and adds the situation will get even better.
The report noted that public sector banks are bringing down operating expenditure and expanding rural reach by experimenting with smaller branches and increasingly using business correspondents (BCs). Going forward, more such models are expected to be adopted, leveraging technology.
Prasad Koparkar, senior director, industry & customised research, Crisil Research, 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-&-mortar branch, which is about Rs 100-110 per transaction.”
Crisil Research expects rural branches to become more profitable as the operating expenses ratio improves, along with asset quality.
Ajay Srinivasan, director, industry research, Crisil Research, said: “We see the rural business of PSBs turning around by the end of 2018-19, with return on assets (RoAs) turning a positive 0.3-0.4% because of lower operating expenses and better asset quality.” He was also of the opinion that things will improve for the private sector banks which are already making money from their rural business.
Since 2010-11, banks have been experimenting with various models to bring down operating expenses and expand reach in the rural areas — business correspondents, for one, Crisil added in the report.
According to the report, “Technology allows business correspondents to transact real time, at very low costs. A rural business correspondent enables customer interaction at a 15th of the transaction cost of a typical rural branch.”
The report also mentioned that banks need to maintain constant vigil on the risks, responsibilities and management compliance they transfer to third parties.
