Most of the Indian population is living in the villages and the agriculturists are playing a vital role in the economic development. Agriculture credit is helping them and it provides livelihood to the country’s population. But only agriculture credit is not sufficient for them. Other credit requirements are also there for them. One of the most important is the retail credit because they also required house, vehicle and other essentials to change their life style.So far we are thinking about economic development in the Urban/ Metro areas and this rural segment is left behind, even though the income level has increased substantially; because the lower income groups are moved to middle income group in rural areas. It has been also observed that, due to increase in literacy rate and unemployment in the agriculture sector, rural people are forced to go for non-agriculture activities to get the other income.The presence of increased middle income group in Rural Area demands credit facilities at par with the urban people and providing ample opportunities to the banks to extend credit to non-farm sector.Retail Credit is also an important instrument for rural development. Retail lending in India is not new for banking but it needs a reform, considering the difference in livelihoods of Urban and Rural People.
There are several efforts witnessed from banks to catch the agriculture loans in rural areas but there is no evidence for tapping retail loans in rural area.Banks are seeing the Retail Credit growth in Urban/Metro areas but they are not putting required efforts for the growth in rural areas.In rural lending the growth is found in agriculture and small business loans but still not finding growth in retail lending.There is a significant flow of bank credit to finance agriculture and allied activities compared to retail credit in rural areas.Over the past few years, there is a lot of retail lending in Urban/Metro areas but rural areas are still suffering from such financial services. This is mainly due to security, income proofs and other documents required by banks which is not easily available with the rural people.There is a limited access of Retail Lending Products in rural population and still informal sources are very much affective in Rural Lending, Banks have still not reached to the potential in the area although the rural economy constitute around 50% of GDP. If we talk about holding of credit cards by rural people, it will be almost zero or only few people have availed this facility, although in recent years retail banking has evolved as key area for growth in Indian Banking which is evident by rising trends in retail loans.
Major factors affecting Rural Retail Credit Growth:
- Lack of Marketing efforts: In Rural Area different marketing approach is required to catch the business, as the nature and characteristics of the area is quite different than the urban area. There is lack of proper marketing effortstowards reaching the last mile. For marketing in rural area familiarity with the area, proficiency in local language, acquaintance with Rural Folks, Public Relations, need based sponsorship is required.
- Small Loan Accounts: Unlike urban area the loan size of the rural area is small. But banks are targeting for big ticket size advances so there retail business concentration is low in this area.
- Lack of Security: In Rural area the land records was not updated or the property ownership was not transferred to the present owner in case of ancestral properties. But in the present people are also aware about that and State Governments have also taken initiatives to update the land records.
- No specific product: No Specific Retail Lending Products for rural areas are designed and developed by financial institutions to tap the market. There is a need of customer specific/ area specific product or offering on regular basis.
- Lack of Margin: In the past due to low income in this area the required margin was not available with the people, but their income level has increased and they have also inculcated the savings habits.
- Rejections of Loans: Rural people are new to the retail lending and their repayment behaviour is unknown which may be the threat to the banks and chances of rejection are more.
Banks Approach needs an innovation:
Rural areas have special characteristics and their required product should be as per the specific needs of the person. Reaching to the villages of eastern U.P. (Uttar Pradesh) requires a different banking practices than the rich centres of Bengaluru and Mumbai. For growth in the Rural Areas banks have to consider customer expectations, technological capabilities, regulatory requirements, demographics and economics. Anytime, anywhere banking using differentiated channels and technology will enable a multi fold increase of reach in rural & remote area. Bank/ Branch has to develop the ability to view customers as a “segment of one” recognizing their uniqueness and tailoring their offerings so that customers view banks as “meeting their needs” not pushing products.A few numbers of simple products can be customized and the bank has to maintain long term relationship with this segment to doing the series of transactions in Retail Lending and Cross Selling. Banks are looking for an opportunity in urban areas, due to urbanisation they require houses/ vehicle for a better life style; if same concentration can be given in the rural area then people will not move to the urban areas. For capturing the needs of low income groups, skilled employees are to be posted in Rural Branches. The following innovative approach can be adopted:
- Product innovation – as per area specific scheme.
- Tapping of potential rural customers.
- Cross Selling of Retail Lending Products through the Jan Dhan Accounts.
- Improved process and bundled product offerings.
- Customer specific product or offering on regular basis.
- Focus on understanding customer needs or preferences.
- Moving from class retail lending to mass retail lending.
Drivers for Retail Growth in Rural Areas:
There are a lot of improvements witnessed in the rural area like communication, connectivity, literacy etc. The following points which is indicating the scope of retail lending opportunities in the rural area:
- Increase in business and economic activities
- Change in demographics
- Increase in disposable income and purchasing power
- Increase in literacy level
- Technological enrichment
- Increase in financial literacy
- Improved lifestyles at par with urban people
- Nuclear family concept is started in rural area
- Need of higher/ professional education
There is a tremendous scope for increasing credit to retail segment in rural area. Rural Retail Consumer who represents a huge untapped market for consumer credit will be the more profitable sector for banks. The data base available with the banks will be the main source of their demographic and information that can be used by the banks to targeting those customer segments. The detailed consumer databases are available for data mining to design customized financial services/products. The banks have to update the database of consumer as credit information. Customer in Rural Area demands highly personalized banking products and services. Understanding the rural customer behaviour, offering customized products, doing the right partnership/ collaborations and developing the appropriate business models and organization structure is the pre-requisite for the banks to tap the vast potential of rural area.
Affordable Retail loan products in Rural Area are basic demands similar to the urban area. Housing Loan, Vehicle Loan, Education Loan and Personal Loans are the main penetrating products of Retail Lending in Rural Area. Apart from these products the penetration of Credit Card will be also the beneficial product. There is huge demand of housing in rural area and the majority of the housing is self- financed; except some of the weaker section housing through the Govt. Schemes. There is a need of financial innovation in housing sector in rural area. There is sharp increase in the literacy level in the rural area and the parents are willing for professional and higher education to their wards. There is need of education loan for such parents and students for pursuing the higher/professional education. Government has already announced the interest subsidy scheme under education loan for lower income group. Banks have to design and develop the special educational loan scheme for such parents/ students where there is lack of security/collaterals and they need higher quantum of loan.
Several efforts made by RBI as well as Central Government to boost agriculture credit by establishing Regional Rural Banks and National Bank for Agriculture & Rural Development (NABARD) and scheme like Mudra Loans, PMEGP etc. for small business. Several Government Subsidy Schemes are implemented by State and Central Govt. to boost the agriculture and business loans. There is a need of many such efforts to boost the Retail Credit in Rural area by establishing Small Retail Loan Banks/ Retail Loan Subsidy Scheme/ Prime Minister Scheme for Retail Loans etc. RBI has imposed regulatory ceiling/target for agriculture and small business loans under priority sector but there is no such ceiling/ target imposed for Retail Loans under priority sector classification. So there is a need of such ceiling/target to be imposed by RBI for retail loans for rural area as a part of priority sectorlending. RBI may impose ceiling on interest rate for Retail Loans for these sectors.
We hope Indian Banks are expected to see strong growth in Retail Lending in Rural area over the years. In near future, banks with vision and mission will try to capture this Retail lending opportunities through a series of innovative additions to their products, services & technology and marketing methods.