Innovative and non-innovative determinants of viability of rural banking by nationalized commercial banks

Abstract

The Nationalized Commercial Banks (NCBs) have played an important role in economic development of the rural areas by promoting credit and deposit services for agriculture and allied sectors through their branches. This has assisted in technological progress in this sector and in augmenting the income of the rural people. However, concerns about the viability of rural banking have been expressed. It is contended in some quarters that rural banking is non-viable. But some others have shown that it has low viability but not non-viability. The present research therefore addresses (1) Whether rural banking is viable or not? (2) Does priority sector advances adversely affect the viability of rural banking? (3) What are the impacts of the innovative and non-innovative factors on the viability of rural banking? (4) What are the recent micro-innovations in rural banking? How did they emerge, and what are their likely implications to the financial viability of rural banking?

Unlike the major past studies which consider the viability of one operation like lending, this study measures the viability of an enterprise/institution. This study analyses the costs as well as unit profit behaviour of rural banking through both tabular and econometric methods.

The econometric approach to cost analysis utilizes theory of costs to trace the behaviour of costs of transaction, funds, and both of these for 60 rural branches of Bank of India in Eastern zone. Priority sector advances and short duration deposits are considered innovative determinants of these costs. This is because these operations entail altogether new methods of appraisal of potential and mobilization compared to the urban and industrial banking. In addition to these two innovative portfolios, the influence of scale economies in costs and unit gross margin among other factors are considered in analyzing the behavior of unit profit of the sample branches. Similar unit profit analysis of 28 NCBs is also attempted through a multi-variate econometric model. Case studies of four micro level innovations analyze two integrated produce marketing loans, one hi-tech agricultural loan, and one farm credit card. Major findings are as follows: (1) Rural banking is viable as is suggested by the tabular analysis and further validated by the econometric analysis. (2) Innovative rural loan and deposit portfolios have superior scale economies compared to non-innovative portfolios. (3) Contrary to general view, priority sector advances have a positive impact on viability. (4) Reaping scale economies, especially in transaction costs is more important than unit gross margin in improving profitability of rural banking.

(5) Innovations developed at the grass root level have been more successful compared to the one designed at the top. More decentralization, autonomy, higher risk taking behavior, and corporate management support are critical for such innovations.