ROLE OF PRIVATE SECTOR BANKS FOR FINANCIAL INCLUSION

Transcription

1 270 ROLE OF PRIVATE SECTOR BANKS FOR FINANCIAL INCLUSION ABSTRACT DR. BIMAL ANJUM*; RAJESHTIWARI** *Professor and Head, Department of Business Administration, RIMT-IET, Mandi Gobindgarh, Punjab. **Assistant Professor, Asia Pacific Institute of Information Technology SD, Faridpur Road, Near Toll Plaza, Panipat. The article explores the geographical distribution of private sector banks in India and its impact on financial inclusion. The article evaluates the correlation of number of private bank branches with economic freedom and ratio of development expenditure of states to gross state domestic product. At end March 2010, 50.6 million no frills account were opened by the banking system. The banks have a challenge to keep these accounts operational. Banks were advised to provide small overdraft in these accounts, and up to March 2010 banks provided overdraft of Rs crore. No frills account provides the opportunity for a common man to open bank account. These accounts have no pre condition and low minimum balance maintenance. RBI initiated scheme of no frills account in 2005 to improve financial inclusion. KEYWORDS: Financial Inclusion, Gross State Domestic Product, No Frills Account. 1. INTRODUCTION Indian banking system has emerged as a vibrant sector in the Indian economy. Strong regulatory mechanism, inherent strength in the economy, and progressive policy framework which supports, nurtures, and helps in growing the financial institutions. There has been amazing growth in profits in our banking industry over the last two decades. The banking sector index has grown at a compounded annual rate of 51% since the year Many of the private sector banks had significant exposure to global financial world. Due to the global exposure private banks were adversely affected during recession. Timely interventions by RBI made it easier for banks to overcome the adverse impacts of recession.indian banking system remained resilient during the recession. It was due to conservative approach of banks, cost cutting measures, and following the guidelines of RBI. RBI reduced statutory liquidity ratio (SLR), cash reserve ratio (CRR), Repo rate, and Reverse repo rate to increase the money supply to ease the tight liquidity position. No single bank needed government bailout during recession. Private sector banks pioneered the use of technology to provide enhanced customer services. Anywhere and anytime banking became a reality. The widespread application of internet banking had made it possible to market financial products and services on a global basis.

2 271 Despite the sound and robust banking system, there are certain challenges. Indian banking is too fragmented as compared to global standards. To compete globally Indian banks need to scale up the size of their operations. 2. GEOGRAPHICAL DISTRIBUTION The private banks started from the metropolitan cities. After growth in metros, the private sector banks are expanding their network into urban, semi urban, and rural areas. Table shows the network spread of private banks in different types of population group. Private Banks are not just concentrated in metros but they have started making inroads into the rural market as well. The semi urban areas have benefitted significantly from the presence of private sector banks. 30% of the branches of private banks are in semi urban areas. CHART1: GEOGRAPHICAL DISTRIBUTION OF PRIVATE BANKS TABLE1: STATE WISE DISTRIBUTION OF PRIVATE SECTOR BANKS

3 272 TABLE2: RANKING OF TOP 20 STATES/UT ON THE BASIS OF NEW BRANCHES Initially private bank branches were concentrated in the southern and western states. But the trend of new branches indicates that there is increase in branches in other regions also like Uttar Pradesh added 265 more branches over 91 old branches, Rajasthan added 141 new branches, Madhya Pradesh 117, Assam 46. The enhanced standard of governance in Bihar is also reflecting in terms of growth in number of branches. Bihar added 40 new branches.

4 273 TABLE3: RANKING OF TOP 20 STATES/UT ON THE BASIS OF NEW BRANCHES 3. CORRELATION OF NUMBER OF BRANCHES WITH THE CHOSEN VARIABLES First variable chosen was ratio of development expenditure to gross state domestic product. Correlation of number of branches of private banks with ratio of development expenditure and gross state domestic product was calculated by collecting secondary data. TABLE4: EXPENDITURE PATTERN OF STATE GOVERNMENTS STATE DEVELOPMENT EXPENDITURE/GSDP RATIO ( )Avg. ( )R.E % increase Andhra Pradesh Bihar Chhattisgarh Goa Gujarat Haryana

5 274 Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal Arunachal Pradesh Assam Himachal Pradesh Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura Uttarakhand NCT Delhi

6 275 Puducherry It was observed that Bihar had registered the highest percentage increase in the ratio of development expenditure to gross sate domestic product. The improved governance is also reflected in the state elections and increase in the number of branches of private banks. It was observed that the North Eastern states are showing higher development expenditure to GSDP ratio, as compared to the bigger states. This is also reflected well in terms of increased presence of private banks. Though other variables may also be studied to justify the growth of private banks in the different regions. TABLE5: RANKING OF STATES (BRANCHES VS RATIO OF DEVELOPMENT EXPENDITURE/GSDP) Ranking No. of Branches Dev. Exp./GSDP Tamil Nadu 1 8 Kerala 2 10 Maharashtra 3 11 Karnataka 4 16 Andhra Pradesh 5 6 Rajasthan 6 12 Gujarat 7 13 Uttar Pradesh 8 4 Punjab 9 7 West Bengal 10 3 Haryana Madhya Pradesh 12 9 Orissa 13 2

7 276 Jharkhand Chhattisgarh 15 5 Bihar 16 1 Spearman rank correlation between number of branches of private banks and the ratio of development expenditure and gross state domestic product was observed to be It was observed that there is little correlation between the two variables. In case of special states the correlation can also be calculated. TABLE6: RANKING OF SPECIAL STATES/U.T (BRANCHES VS RATIO OF DEVELOPMENT EXPENDITURE/GSDP) Rankings No. of Branches Dev/GSDP Jammu & Kashmir 1 11 Uttarakhand 2 12 Assam 3 1 Himachal Pradesh 4 9 Puducherry 5 7 Meghalaya 6 3 Tripura 7 6 Sikkim 8 4 Nagaland 9 10 Mizoram 10 8 Arunachal Pradesh 11 2 Manipur 12 5

8 277 Spearman rank correlation between number of branches of private banks and the ratio of development expenditure and gross state domestic product is It was observed that there is little negative correlation between the two variables. TABLE10: RANK CORRELATION OF BRANCHES OF PRIVATE BANKS AND ECONOMIC FREEDOM Ranking No. of Branches Eco. Freedom Tamil Nadu 1 1 Kerala 2 8 Maharashtra 3 9 Karnataka 4 11 Andhra Pradesh 5 3 Rajasthan 6 6 Gujarat 7 2 Uttar Pradesh 8 12 Punjab 9 10 West Bengal Haryana 11 4 Madhya Pradesh 12 5 Orissa Jharkhand 14 7 Chhattisgarh Bihar 16 16, scribd.com

9 278 The rank correlation according to spearman rank correlation is A positive association was observed between number of branches and economic freedom in states of Tamil Nadu, Andhra Pradesh, Rajasthan, Punjab, Orissa, Chhattisgarh, and Bihar. 4. COMPARISON WITH REGIONAL AVERAGES FOR FINANCIAL INCLUSION TABLE7: FINANCIAL ACCESS OF INDIA AS COMPARED TO ASIAN AND OECD COUNTRIES Countries/groups Financial Access Financial Market Size & Depth No. branches/ persons of No. ATM s/ persons of India Asian Peer Group Range China Indonesia Malaysia Thailand OECD range Countries Australia Canada Japan UK US , World Bank In terms of number of branches India is in a better position as compared to China, whereas it lags behind Malaysia and Thailand.ATM density is lower than China, Malaysia, and Thailand, though it is better than Indonesia. Branch network of OECD countries are four times, ATM density100

10 279 times, financial market size and depth about three times better than India. Financial market size and depth is calculated by using private credit to GDP ratio. Private credit to GDP refers to the claim of banking sector on the private sector as a percentage of GDP. According to the recent statistics of RBI, in India number of branches per 1,00,000 persons increased to 7.13 in 2010, and number of ATM s per 1,00,000 persons have increased to 5.07 in The ratio of private credit to GDP has increased to 56.1 percent in 2010 according to the recent Reserve Bank data. TABLE8 NUMBER OF ATM S LOCATED AT VARIOUS CENTERS Rural Semi Urban Urban Metropolitan Total Public sector banks Private sector banks Foreign banks Total TABLE9: GEOGRAPHICAL DISTRIBUTION (%) OF ATM S IN INDIA Rural Semi Urban Urban Metropolitan Total Public sector banks Private sector banks Foreign banks Total Private and foreign banks contribute 17.45% of ATM s in rural areas. This provides the opportunity for banks to improve financial inclusion, leveraging technology to provide other services like microfinance % of ATM s in semi urban areas belong to private and foreign banks. Semi urban areas are the biggest beneficiaries of private sector banks in terms of improved ATM density. In urban areas 31.94% of ATM s are owned by private and foreign banks. In metropolitan areas private and foreign banks share 42.21% of all ATM s.

11 280 CONCLUSION The private sector banks are providing their services in all the population groups. They have started expansion plans in semi urban and rural areas. This is a good sign for ensuring financial inclusion and better quality of service in these areas. The number of branches of private banks with economic freedom of states shows better rank correlation than with ratio of development expenditure and gross state domestic product. Information and communication technology offers the opportunity for the private banks to improve financial inclusion for the unbanked people. REFERENCES Debroy Bibek, Bhandari Laveesh, Aiyar Swaminathan S.Anklesaria, Economics Freedom of States of India 2011, Academic Foundation, NEW Delhi, PP 13-14, available athttp:// [Accessed 14/3/2011] Report on Trend and Progress of Banking in India , available at %20Banking%20in%20India [Accessed 14/03/2011] State Wise Analysis of Fiscal Performance, Reserve Bank of India, available at [Accessed 15/3/2011]