Banking sector on fast track

ABOUT four years ago, the then Reserve Bank of India (RBI) governor
Yaga Venugopal Reddy visited four northeastern states - Meghalaya, Assam,
Nagaland and Tripura.

It wasn’t unusual for an RBI Guv to do so.
But this visit was special. It was the first time that Reddy
got a fix on the reasons behind the dismal state of banking
in the North East. Something that prompted him to depute a
key lieutenant - RBI deputy governor Usha Thorat - to draft
a master plan for financial services development in the region on a war-footing.

Never before had RBI taken such a conscious step to shore up banking
penetration in Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland,
Tripura and Sikkim.

The challenges are numerous - the difficult terrain,
the remote habitation zones, the innumerable logistical
cum communication bottlenecks, not to mention the insurgency
problem. All have stifled economic and banking development over the years.

It was with a bid to surmount these hurdles that the
Usha Thorat Committee advocated bigger IT adoption
levels and usage of intermediaries like business correspondents
and business facilitators to serve people in remote areas.
And the good news is that banks - both public sector banks
(PSBs) and new-gen private players - have made conscious
efforts to place the North East in their expansion map following
the RBI’s diktat.

Ever since, the total number of bank branches has seen a
sharp surge. From a sub-1900 level as on June 2005, the
region now has around 2,100 bank branches. Besides,
banks are taking the intermediary route and using IT-enabled biometric
cards to penetrate deeper pockets.

From a purely business perspective, expanding financial
business in the North East would have been lucrative, given
the lack of banking penetration over there. Even today,
bank branches in the region cover an average population
of around 21,000.

According to RBI’s prescription, the average population per
branch should not ideally be more than 10,000. But issues
that blocked banking growth were the lack of economic
activities, besides typical issues like infrastructure and insurgency.
he scene seems to be changing fast.

In fact, government funds appear to be pouring in thick and
fast into this region. "This typically enhances the potential for
banking business," says Satish Chander Gupta, chairman and
managing director of United Bank of India (UBI), which has a
better presence in the region with 250-odd branches. UBI’s
experience shows the region is a goldmine in terms of low
cost current and savings deposits. Mobilization of such deposits
directly boosts a bank’s profitability.

So much so that banks have started making a beeline with
proposals to expand their footprints in the region. Big guns
like State Bank of India, United Bank of India, Allahabad Bank
and UCO Bank will add 55 branches between them in the course
of the next six months to take their collective tally to 1,039.

SBI has over 550 ATMs in the region and it is adding another 500.
It is using intermediaries like Indian Grameen Services as business
correspondents. It has other 300-odd business facilitators too as its
extended arm for offering minimum banking services.

The search of low-cost deposits has even drawn private players
like Axis Bank and HDFC Bank.

Even the tiny Kerala-based South Indian Bank,
which has merely two branches - in Guwahati and
Agartala each - has firmed up plans to open four more
branches, aggressive by its standard.

And yet, the pace of the development could have been faster,
a section of the bankers feel. "The expansion of banking - both
in terms of physical presence and via intermediaries - hasn’t
gathered pace the way we would have liked it to," says National
Bank for Agriculture & Rural Development’s (Nabard) chief general
manager in Guwahati, AK Jain.

This is how UBI’s Mr. Gupta assesses it. "It’s a difficult terrain to
work on. Credit expansion has always been a problem in the
absence of large-scale industry. But with more regulatory focus
of late, the region has started to throw up big opportunities for
banks and financial companies. It’s now a matter of generating
awareness about the region’s potential." Others senior bankers
agree to this view too.

The new entrants in the region are typically looking at capital towns.
"This is quite on expected lines as every one need a base first before
going into deeper pockets of the region," explains Allahabad Bank
chief KR Kamath.

"We are also finalizing plans to have our network in states
where we are not present now," he says. The bank has decided
to open its maiden branch in Arunachal Pradesh shortly. It is also
absent in Mizoram.

There many reasons for banks to take the North East seriously.
Here’s what Allahabad Bank’s zonal head in Guwahati, S Pal Choudhury says:
"The insurgency problem has somewhat fizzled out in Assam.
There is occasional trouble in rural belts but the towns are safer
nowadays. Other states are more peaceful now, excepting Manipur."

HDFC Bank’s regional head (east) Gulzar Singh seconds the emotion.
"Our bank is present in the major cities or towns of Assam where the
effect of insurgency is minimal. The day to day functioning of the bank
is not affected. We do not have a presence in Manipur."

Only recently, RBI took another watershed step to propel financial
services in the North East. Top bankers have always cited that opening
of branches in many parts of this region are commercially unviable.
To address this, RBI has offered a viability gap financing scheme for
new branches in select places. This may also be tried out in other
parts of the country, according to Usha Thorat.

On top of all this, the new-found determination of the Manmohan
Singh government to lift the North Eastern Region to a position of
national economic eminence has created the requisite buzz among
business houses.

The government has earmarked 10% of the gross budgetary support
given to all eligible ministries exclusively for the region. Moreover,
Gail’s Rs5,461-crore Assam Gas Cracker Project has just achieved
financial closure and this is expected to pave the way for more
business in the region.

"The Tea Gardens in Assam, Trade & Commerce in Tripura or Private
Coal mines of Jowai in Meghalaya offer huge opportunities for business.
Moreover, economic parameters like consumer markets, investment
opportunities, infrastructure, urbanization, trade and commerce,
inclusiveness and prosperity of the states offer unique opportunities
for business development for the bank," HDFC Bank’s Mr Singh says.

HDFC Bank is present in four northeastern states - Assam (13 branches),
Meghalaya (2), Sikkim (2) and Tripura (1). In the next six months,
it is going to add six more to this tally.

Its close competitor Axis Bank opened eight branches in the
last 12 months to take the tally to 29 branches. It has promised
to add a couple more by March 2010.

"The North East is poised for accelerated economic development
following the government’s `Look East’ policy. The work of the road
connectivity with the Asian nations has already started. T
his would greatly reduce the distance and also make cross
border trade and commerce with the Asian nations an attractive
proposition," Mr Singh observes.

So far so good.
Nevertheless, the Northeastern region needs
to address the governance issue to further boost
investment flows.

Even, as the Vision 2020 report prepared by
ministry of development of the Northeastern
region says, diplomatic initiatives with the
neighborhood countries needs to be strengthened
to foster border trade.

Which is one of the mainstays
of the otherwise agrarian northeast economy, as 96%
of the borders of the region constitutes international boundaries.