Rural operations to turn profitable in 5 year for public sector banks: CRISIL

The rising economies of scale with higher business per branch and usage of low-cost channels such as business correspondents (BCs) will help public-sector lenders, which are currently incurring losses in their rural operations, to turn in profits over a five-year time-frame, according to CRISILResearch.

“As for private banks, rural operations are already mildly profitable, generating a 10th of their overall returns, and the situation will get even better,” said a CRISIL  report released on Monday Stock Market Trading Tips

According to CRISIL Research estimates, in the past five years, business per branch in the rural areas has grown at a compounded annual growth rate of seven per cent, despite the overall branch network growing at nine per cent annually. “The economies of scale are set to increase further in the years to come,” CRISIL noted.

A case in point is the recently-launched Pradhan Mantri Jan-Dhan Yojana. While this poses challenges for banks in the short term, it would augment business per branch in the long term. Banks are also bringing down operating expenditure and expanding rural reach by experimenting with smaller branches as well as BCs Financial Astrology Trading Tips

According to Crisil, more such models are expected to be adopted, leveraging technology.

“Improvement in technology and favourable regulations have made it possible for banks to service their rural customers through business correspondents at a 15th of the cost of a rural brick and mortar branch, which is Rs 100-110 per transaction. We expect 25-30 per cent of liability-side transactions in rural areas to be routed through BCs by 2018-19, up from 8-13 per cent currently,” said Prasad Koparkar, senior director (industry and customised research) at Crisil Research Intraday Trading Tips

According to Crisil, rising scale and reduction in costs will drive down the opex ratio  (operating expenditure as a proportion of average funds deployed) of the rural branches from 1.6-2 times that of non-rural branches to 1.3-1.4 times by 2018-19. Asset quality will also improve as credit bureaus and research agencies penetrate deeper into the countryside, and as economic growth picks up. These factors will help improve profitability Personal Numerology Tips

“We see the rural business of public-sector banks turning around by the end of 2018-19, with return on assets turning a positive 0.3-0.4 per cent because of lower operating expenses and better asset quality. For private-sector banks, which are already making money from their rural business, things will improve further,” said Ajay Srinivasan, director (industry research) at Crisil Research Nifty Trading Tips