ABC Bank has transformed itself in the recent years, diversifying into retail banking,

insurance, Asset management and venture capital to become one of the fastest growing
financial institutions in the country. ABC Bank has been achieving high growth in the retail
banking sector. However, the MNC banks and PSU banks are also increasing their presence
in this domain, hence, the competition in retail banking domain is going up and margin is
getting squeezed. The last two years has seen an expansion in the number of private sector
banking institutions with the Reserve Bank of India giving differentiated licenses to small
banks and payment banks. There has also been a significant increase in new licenses for non-
banking financial companies and housing finance companies, focused mainly on the retail
segments.

The retail sector, the bread and butter segment for ABC Bank, is sluggish, in line with the
overall industry trend. To keep up with the competition, the bank has been adopting various
strategies to sustain the retail banking business like product innovation, New delivery
Channels (Internet, ATMs), Infrastructure outsourcing, Business Process outsourcing etc.
However, increasing competition in this segment was making the management thinking in
different ways

Last week, the management called a meeting to look at the figures of the squeezing margins
and the increasing competition. During the discussion Mr. Anchal Jolly GM – M&A,
suggested the Bank can consider concentrating on domestic market and Rural Indian
markets. He emphasized on the need to focus on spreading the reach of banking services to
the un-banked population of India. This idea was well accepted and he was asked to gather
a team and do a research to present the statistics and the rural banking scenario

The below data points were presented in the next meeting:

Rural Penetration:

Based on the 2001 census, about 72% of India’s population are living in rural areas. People
residing in urban and rural areas may have different needs and priorities but the need for
financial services is common to both.

Statistics state that only 37% of bank branches of Scheduled Commercial Banks are in rural
areas with only around 40% of the population holding bank accounts. It is therefore essential
that people get connected with the banking system, availing a range of transactions, payment
services, access to affordable credit, insurance and savings products.

Limited Rural Banking Penetration

• Only 5% of the 600,000 village habitations in the country have a commercial bank branch

• Only 40% of the population have bank accounts

• Debit card holders constitute only 13% of the population and only 2% have a credit card

• 51.4% of nearly 89.3 million farm households do not have access to any credit either from
institutional or non-institutional sources.
• Only 13% of farm households are availing loans from the banks in the income bracket of <
Rs. 50,000.

In a recent report, New Main Streets, it is highlighted how the non-urban markets can deliver
nearly 25 per cent compounded growth over the next decade and help banks to improve
profitability. They believe that not only profitability of these markets, but also changes to
regulations, improvement in technology and access to market information are supporting it.

To increase the penetration of banking services in these areas, RBI has relaxed its rules. Under
the new rules, scheduled commercial banks need not take prior permission from RBI for
opening branches in Tier 3 to Tier 6 centres; where population is upto 49,999.

The total demand for microfinance is around Rs 45,000 crore, while the supply was just about
Rs 2,000 crore. With the use of technology, the bank can start tapping into the micro- banking
space in rural India, utilizing partnerships with multinational and local agricultural
institutions.

All the major banks have been competing heavily in metropolitan cities and urban areas to
attract and retain middle class customers. There has been limited focus on rural segment due
to under developed physical infrastructure. But in present times increased competition
along with government’s proactive development policies for rural areas has been forcing our
competitors to devised new strategy for this segment. Who are present there and taking care
of the needs of rural population, are largely focused on farm credit and agri- finance
(including loan requirement for allied agricultural activities). Hardly any bank is there
which tries to know the aspirations of these people, residing in villages.

Therefore, we can go beyond agri-financing and think about expanding in this part of the
country through the non-agri-financing route. ABC Bank can lend money to their customers
for the purchase of household goods, for the education of their children, for helping them to
set up trade and industry, etc. As far as increasing the base is concerned, rural population
should form the core of lending for all the banks, be it public sector, private or foreign. Rural
India has many small and medium scale industries, professionals, agriculturists etc. as
potential customers.

The challenges that are likely to be encountered include:

• Coverage – The large size and population makes it difficult for any program to include
everyone. Moreover, it is difficult to account for migrant labor, where money primarily flows
through unorganized channels

• Infrastructure – Insufficient and underdeveloped infrastructure emerges as a potent barrier

in the functioning of a banking outlet

• Financial Products – Products need to be simple and flexible in order to cater to the
requirements of the mass population

• Technology – The use of adequate and appropriate technology has the ability to steer the
direction of inclusive growth, helping to reduce the cost of transactions.
 ABC went through a restructure process a decade ago and decided on a new paradigm to
leverage technology for service delivery and this has paid off significantly. Now, we believe
the same can be done in the rural parts of the country. Therefore, rural banking can be the
new area of focus through micro finance, rural Internet kiosks and low-cost ATMs. We see
the rural market as the next big opportunity. The rural portfolio, potentially a gold mine,
still lacks the scale, to compensate for the downturn in the retail business.

RBI has permitted banks to avail of the services of companies having retail outlets, retired
government employees, teachers, grocery shop owners, insurance agents, SHGs and post
offices in the capacity of Business Correspondents (BCs). BCs deliver retail banking services
such as opening of a bank account or fixed deposit, collecting interest on loans, selling
insurance and mutual fund products, issuing receipts etc., on behalf of banks to the rural
customers. The services can be delivered through Internet kiosks or hand-held
communication devices linked in real-time to the bank’s core banking network

According to Telecom Regulatory Authority of India, there are about 77 crore wireless
telephone subscribers in India. Out of these, nearly 26 crores are rural subscribers. This shows
that mobile banking model can be effectively used by us to offer our services in the remotest
areas.

Based on the economic survey (2013- 2014), about 42 per cent of savings in rural India are held
in the form of cash. Through tailor-made financial inclusion schemes, the cash available in the
hands of rural masses can be diverted to savings bank accounts. The crucial thing for ABC
Bank in rural areas is to simplify the documentation process and create awareness about
different financial services on a large scale. This will eliminate the involvement of touts, agents
or middlemen in the transactions between banks and their customers.

What strategy should it use to enter this market and make a brand name? How can it leverage
it’s technology platform for service delivery in the rural market