Rural credit growth gathered steam in FY20 and surpassed growth in other categories after a gap of four years. Private banks have begun to gain share in this segment even as public sector banks’ (PSB) footprint reduces, the Reserve Bank of India (RBI) said in its report on the trend and progress for the year.
Although the share of rural credit in aggregate credit has been hovering between 8-9%, it still did better than other categories in 2019-20. “While the share of PSBs in rural credit has gradually fallen, PVBs have been making inroads,” the report said.
The central bank said that the new branch authorisation policy of 2017 —which recognises business correspondents (BCs) that provide banking services for a minimum of four hours per day and for at least five days a week as banking outlets — coupled with emphasis on digitisation and modernisation of technological infrastructure has progressively obviated the need to set up brick and mortar branches. As has been observed for the last few years, including during FY20 also, branch expansion in rural areas remained subdued as the BC model made further inroads in villages with population more than 2,000.
Private banks are also taking away share from PSBs in other segments. While PSBs dominate bank lending to non-banking financial companies (NBFCs), their share has declined since March 2020, with the space vacated being taken up by the private banks.
“In line with the increasing share of PVBs in banking assets, their share in operating profits also increased to 43.4% in 2019-20 at the cost of PSBs,” the RBI said, adding that the gap between net interest margins (NIMs) of PVBs and PSBs enlarged as the former managed to lend at comparatively higher rates while reducing their deposit rates.
At the same time, the growth slowdown has not spared the private banking pack. Describing them as “the engine of credit growth during the last few years”, the report stated that in a reversal during FY20, however, their loan growth decelerated across sectors. “Lending to industry and agriculture sector by PVBs and PSBs also slowed down or declined,” it said.
The aggressive credit growth of private banks in the services and retail segments in the last few years — which surpassed the 30% mark in FY19 — came down sharply, even as PSBs managed to hold on to market shares in the retail segment.