Bridging gap between urban and rural banking

Enayet Rasul

According to reports, the Bangladesh Bank (BB) recently frustrated a move

by BRAC Bank to set up 140 new branches in rural areas in 2008. The BB
finally authorised the establishment of only 20 such branches by BRAC
Bank. The BB had its reasons for not giving the permission but one
understands that the BRAC bank has a reputation for doing positive work
specially in the area of small and medium enterprises that suit the
entrepreneurs in the rural areas.

Ii is also well known that there is a dearth of banking facilities in the rural
areas. Banking in Bangladesh has a heavy urban bias. The country's 30
commercial banks (PCBs) have 72.50 per cent of their branches in the urban
areas and only 27.50 per cent in the rural areas. The foreign banks have a nil
presence in rural areas. The state-owned banks have been progressively
winding up their operation from non urban areas. In this backdrop when the
overall progress of banking activities in rural areas is already comparatively
smaller and has been slowing down further, it is pertinent to ask how far
pragmatic was the BB's decision to curtail the BRAC Bank's major
expansion move in the rural areas.

Grammen bank and others operating non-conventional banking services in

the rural areas report high degrees of recovery or success in their loan
operations. With easy access to banking services, the rural areas, on the one
hand, would be fast growing and diversifying economically with positive
impact of the same on income generation and poverty reduction and, on the
other, the banks would be doing well for themselves by dealing with
dependable clients. Clearly, the banks must think up innovative ways to
extend their services to rural areas and help the people of these areas climb
out of the poverty trap. This is a challenge facing the country's banking
sector but it needs to be seen as opportunity also as the success rate of
lending activities by some non-governmental organisations(NGOs) in rural
areas has shown.

According to various studies , the rural areas provide substantial deposits to

the banking system of the country. Such mobilisation of deposits in rural
areas could be much greater if the banks' presence in these areas was bigger.
But presently, as mentioned, the presence of the banks in rural areas is thin
and these areas have a marginal or non existent role as the beneficiaries of
the loan operations of the banks. Not only this is helping economic
inequalities, the same contradicts the principle of extending banking services
uniformly to all areas of the country. Thus, the banks need to be 'facilitated'
to take greater interest in expanding their services to rural areas in their own
business interest of greater deposit mobilisation and loan operations in these
areas and to promote economic growth and development uniformly
throughout the country in the process. The BB is expected to be a facilitator
in expanding the network of rural banking services, not to be ironically an
obstructive factor.

The extension of rural banking by the private commercial banks has assumed
greater importance in the backdrop of the closure of many branches of the
nationalised commercial banks (NCBs) countrywide as part of their
restructuring activities. Extension of banking services by private commercial
banks in areas where the public sector banks have withdrawn, specially in
semi-urban or rural areas, will be much appreciated by the people of those
areas.

It is sometimes stressed that the operations of the nationalised commercial

banks (NCBs) in rural areas need to be curbed in view of their mounting
losses. But the response to such alleged losses need not be closing the
channels of rural banking of the NCBs but to improve their operations to
guard against losses. Banking in the context of Bangladesh, cannot be
entirely divorced from the needs and principles of extending vital services in
neglected areas or extending uniform facilities in the country to meet the
requirements of equity and justice. Besides, mobilisation of resources from
the rural areas-- where the country's population are preponderantly
concentrated and to aid their development or economic growth--also shows
up the necessity of providing ample banking facilities there. Thus, the issues
are how to reconcile these socio-economic needs of creating and maintaining
banking facilities in rural areas with the equally important task of
maintaining viable operations of the banks in the rural areas.

A careful and unbiased study is required to determine the factors for the
losses of the NCB branches in the rural areas to take immediate curative
actions in relation to the same. Many of the NCB units in rural areas are
overstaffed and suffer from unscrupulous activities of their officers. In some
cases, branches of NCBs are located in close proximity that undermine the
gainful operations of all. Yet, there are other issues not directly linked to
banking activities but their existence such as lack of infrastructures and
underdevelopment that impede a rise in banking activities in the rural areas.

Policies need to be in operation in response to all and more of the above

factors that adversely impact on rural banking. Actions can be taken against
overstaffing and this would have an effect on the losses. Similarly, the
relocation of some of the units can be tried to improve the chances of their
viable functioning. Devolution of power to local authorities, the
establishment of strong local government and making them resourceful
enough to undertake local development activities, more investment in
infrastructures in rural areas, etc., would be also creating indirectly the
conditions for expanding the rural banking system.
The private banks, so far, have concentrated in urban areas considering the
returns from rural areas to be small. But they can possibly have a rethink in
view of the very gainful experiences in terms of profits by the bank like
operations of some NGO bodies in the rural areas. The private banks, of
course, are not expected to emulate these NGOs by servicing their rural
clients at cut throat interest rates. But there is very probably a market for
them in the rural areas which they can explore to expand their own business
while responsibly filling gaps in banking services in the rural areas. But
expansion of services in rural areas will be a non-starter for the private
commercial banks as long as they are constrained by imprudent regulatory
activities of the BB.