Banking Penetration in Tier 2 Cities

Cities are considered to be the engines of growth. These cities provide ample economic opportunities to the people and help in escalating economy overall. Realizing this, Indian government has recently started a thrust to build 100 smart cities in India.

Historically, India is gifted with four metro cities but they are already overpopulated and congested. Attempts are being made to rewrite the growth story via tier 2 cities now. India has 50+ cities with more than a million people. They carry the hopes and aspirations of the new India. These cities are able to provide employment, education and higher standards of living, compared to the rural cities.

When the Government came up with Smart Cities Plan in 2015, the idea was to develop growth centres in each of the Indian state which will expand to nearby regions also. Already state capitals have developed into economic centres where an aspirational class is thriving. With 50+ cities having more than a million population like Jaipur, Patna, Guwahati, Bhuwaneshwar, Kochi,etc. people have changed a lot from last decade. Now they travel through air, communicate via mail or mobile, travel to foreign for holidays, read and speak in English, want to work in MNCs, etc. These cities are positively engaging with their demographic dividend to reap the benefits. Already Internet penetration in urban areas is around more than 50% and mobile connectivity is higher than ever, and with Union Budget focusing on new airports construction the rate of growth of tier 2 cities will be high in coming times.

Moreover, these cities are attracting investments and are left with wider opportunities for business. However, these cities still do not have financial services infrastructure. Easy and affordable access to credit is still not available. There are 141 thousand banking branches in India. Out of this 29 thousand are in Metro cities, while 26 thousand are in other urban areas. However, only 5 crore people live in the four metro cities compared to 34 crore people living in other urban areas. Banking penetration is 7 times lesser in other urban areas compared to Metros. This is not to say that Metros have adequate banking facilities. Several pockets of slums in these cities have little or no branches, and the banking experience well off people is still far from hassle-free. However, the situation in Tier 2 cities is much worse. Without a proper banking infrastructure it is not possible for these cities to fuel the next stage of growth in India. With increasing internet penetration, FinTech companies could replace the traditional banks providing banking solutions to the population living there.

With the Government also focusing upon Rurban Mission (Rural-urban continuum fringe), there is possibility of cities growing along with attached rural areas which will provide boost to the Indian economy by creating jobs and opportunities. Tier 2 cities have the best chances to become pragmatic solution to present day problems of economy, the Government needs to invest positively and pragmatically in these areas.

 


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series, and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

Financial Inclusion in India

 

According to the Committee on Financial Inclusion headed by Dr. C. Rangarajan, Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. But the major question remains whether it has been achieved after regular efforts made by the Government? Are citizens financially included now? Were they able to get credit when they needed it?

Data from the World Bank would  (see here) says that as of 2014, nearly 53% of all Indian population has access to bank accounts. This is before the launch of the Jan-dhan Yojna which led to 28 crores new account opened by banks. This coupled with the natural increase in number of accounts and the push by the Government via the demonetization exercise in November 2016 has led to large population of India with access to bank accounts.

However, as Dr. C. Rangarajan points out in his definition, a key aspect of Financial Inclusion is timely access to credit. In the context of credit access it was found that only 7.7 % population borrowed from financial institution while the rest relied on informal means from private lenders or friends. The situation is much worse when viewed from the prism of rural credit access. Farmers and weaker sections are unable to raise money in the hours of need leading to their distressed conditions. Although the Jan Dhan Yojna increased the spread of banked families, it still does not solve the problem of credit access.

In reality, traditional banking facilities are ill-equipped to service the large population of India, and hence large sections of society are flocking to informal means of credit.  In order to get a simple loan, a person may have to get involved in many paper-works and could potentially take months time. Traditional banking institutions due to their high fixed costs are not able to service the credit needs of the credit-hungry population. It is in part due to these problems that RBI is promoting alternate institutions to provide credit via platforms like Peer-to-peer lending platforms. Given the recently controlled inflation levels, RBI’s push is to decrease interest rates, thus such platforms present a good opportunity for investing and earning returns, leading to a win-win scenario for both lenders and borrowers. Peer to peer lending is set to help India finally achieve financial inclusion for its population.

 


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series, and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.