Cracking the rural banking formula

Cracking the rural banking formula

The operational success of HDFC Bank’s Chak Kalan branch,and 267 of its other rural branches in Punjab,deflects the belief that rural banking cannot be commercially viable

In Chak Kalan village — a farming hamlet about four kilometres off the grain town of Mullanpur Dakha in Punjab’s Ludhiana district — one of HDFC Bank’s newest rural branches that opened in November last year has achieved operational break-even,less than eight months since its launch.

No mean feat,considering that the insipid response from prospective applicants for new banking licences — where only 26 applied for new permits as against well over 100 during each of the previous two rounds — has been blamed largely on the RBI-mandated stipulation of banks needing to open one out of every four branches in the hinterland.

The operational success of HDFC Bank’s Chak Kalan branch,and 267 of its other rural branches in Punjab,deflects the belief that rural banking cannot be commercially viable.

What almost conclusively proves this point is that in Punjab,during the last financial year,the country’s second largest private sector bank did not open a single metro or urban branch.


During the year,though,HDFC Bank’s semi urban and rural branch went up from 144 to 254,all a direct result of the bank’s decision to go ‘grameen’. This year,the number of rural and semi-urban is slated to go up to 368,with no addition to the bank’s urban branches. HDFC Bank is replicating the rural formula in other states as well,including Haryana,Gujarat and Andhra Pradesh.

Not that HDFC Bank is alone in the rural foray. While a number of other banks,led by the public sector brigade,are pursuing this with the aim of achieving the 25 per cent target for opening of branches in non-urban areas,in most of these cases the initiative is a regulator-driven CSR activity with question marks galore on the commercial viability of these ventures on a standalone basis.

Punjab National Bank,for instance,has entered into an agreement with CSC e-Governance to use the latter’s Common Service Centres for providing banking services in the villages while during the last fiscal,Corporation Bank covered an additional 155 villages under financial inclusion to take up the total number of villages covered to 3,545.

Syndicate Bank has engaged 514 banking correspondents (BCs) last fiscal and opened eight branches and satellite branches covering about 496 villages last fiscal while,Union Bank has extended banking services to 29,497 villages by providing basic banking services through BCs.

The drawback of using the BC model for rural penetration,wherein a local grocery vendor or handyman is entrusted with a swipe machine,is that the services on offer is limited to mostly cash withdrawals and the BC has few incentives to ensure the bank’s profitability.

For HDFC Bank,the game changer,according to Govind Pandey,the bank’s branch banking head and the force behind Punjab’s rural thrust,was using the bank’s own staff to get the job done,something that has started paying dividends.

In order to crack the formula in rural banking,two things held the key for HDFC Bank’s rural branch managers — starting work early in the morning and progressively moving the touch-points closer to the rural masses.

Nearly all of HDFC’s operational 268 ‘grameen’ branches have junked the conventional 9 am-6 pm bank timings,instead moving to a 7 am-4 pm slot as it is the key to catching the farmers before they go off to fields for work.

The three-member Chak Kalan branch — headed by a branch manager,with one teller and a front staff — is the typical model that HDFC Bank has deployed in its successful rural foray in Punjab.

The basic,freshly whitewashed branch — equipped with air conditioning,an ATM and a back-up generator running in the adjoining plot offered graciously by one of the local farmers — caters to the banking requirements of the rural people in the area,which ranges from farmers wanting a basic no-frills savings account to the needs of the more prosperous local farmers such as car loans.

An outreach programme anchored from an existing branch aims to identify villages where banking demand reaches a critical mass,followed by the opening of another basic three-member branch in the new location,while continuing the outreach from the new branch to include more villages in the fold.

These branches are devised to keep overheads low while offering nearly all basic banking solutions to the catchment zone of 8-10 villages per branch. The outreach programme is a success in itself,spearheaded by a Grameen Banking Officer (GBO),who is attached with a branch and is the first point contact for the bank in a rural location.

He doubles up as a mobile ATM,money depositor,draft maker,account opener,all rolled into one during each of his weekly visits — all at the door step of rural customers. For prior intimation,the bank arranges announcement of arrival of a GBO though Gurudwaras or through rickshaws in the villages.

“Customers have welcomed the GBO initiative and already 3.22 transactions per village per day are being achieved (largely giving or taking cash). When it reaches 15-20 transactions,we will convert it into a two or three member branch,” Pandey said.


The other key to HDFC’s success is the ability of GBOs and branch staff to convert sarpanchs and aarthiyas,or the grain commission agents,as customers. HDFC Bank currently holds 40 per cent of the aarthiya finance market in Punjab. In the Khanna grain market,Asia’s biggest,for instance,HDFC Bank’s one-year old branch on one corner the market has cornered 77 per cent of the business in the mandi despite the presence of a PSU bank branch right at the heart of the market that has been operational for over 20 years.