Rural banking for threshold population

In a developing economy, the financial sectors need to be focused on major portion of population to meet the demands of the real sector. The financial system should be flexible and competitive to cope with multiple objectives and demands made on it by various components of the economy. The financial sector of our country, which has apparently come of age, needs to offer specialised services and customised products to niche segments of the population.
The banking industry is the most important channel to provide various financial services. Though the reach and scope of banking have increased, the huge demand for financial services remains unsatisfied. It is a matter of concern that 56 scheduled and four non-scheduled banks, 31 non-banking financial institutions (NBFIs) and 599 micro-finance institutions cover about 66 per cent of the households throughout the country (source: Institute of Microfinance) whereas the percentage of mobile phone subscriptions at the end of January 2015 is around 75 per cent (source: BTRC).
According to the World Bank, 31 per cent of the total population of Bangladesh had bank accounts and only 10 per cent had formal borrowing relationship with financial institutions in the year 2014. The rate of financial inclusion is lower for rural households because the marginal people don't consider financial services as their daily necessities like mobile phones or using unapproved financial channels which are out of our formal record.
According to the Reserve Bank of India (RBI), financial inclusion is the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost in a fair and transparent manner by the mainstream institutional players.
Financial inclusion centres on developing habit to save money, providing formal credit opportunities and distributing public subsidies and grant of government welfare programmes. Research shows that financial inclusion can help people overcome conditions of poverty. Providing individuals with access to savings instruments increases savings, productive investment, consumption and female empowerment. In our country, the concept of financial inclusion was extensively highlighted  by Dr. Atiur Rahman, Governor of the Bangladesh Bank, for more inclusive growth. This concept was a demand of the time in view of scams of multi-level marketing (MLM) companies which grabbed the hard-earned money of a lot of people. To encourage people to use approved financial channels to meet their demand is the simple objective of financial inclusion in our country.
Inclusive finance or specifically access to finance is generally perceived as a right of the poor people, which is also important for the achievement of Millennium Development Goals (MDGs). Because, appropriate and affordable financial services for the poor people can help improve their welfare. The appreciable initiative of the Bangladesh Bank like Tk 10 accounts for farmers, formulation and implementation of agriculture and SME credit policies, permission for agent banking, policy guideline for green banking, emphasis on financing women entrepreneurs, school banking, banking road-shows inside the country, bank accounts for RMG workers, bank accounts for working street children, Tk 10 bank accounts for cleaners employed by Dhaka's two city corporations, have increased the growth rate of financial inclusion in our country. Decidedly, all these efforts of the Bangladesh Bank are unique among all central banks of the world.
It is to be mentioned that for the pro-poor initiatives of the central bank, an article in China Daily in May 2014 described the Bangladesh Bank governor as 'Poor Man's Governor'. The central bank was given award in 2012 for green banking initiative and 'Green Governor' title was given to Dr. Atiur Rahman in the United Nations Climate Change Conference in Doha. The Banker, a UK-based magazine owned by the Financial Times Group, adjudged Dr. Atiur Rahman as the best central bank governor in the Asia-Pacific region for promoting socially and environmentally responsible financing without compromising on macroeconomic stability.
Despite all initiatives to increase financial inclusion, we are yet to cover the majority of our population under approved financial services. The rate of financial exclusion is very high in rural areas because of some discomforts from both demand and supply sides. Demand-side problems are: very low level of financial literacy level to choose various financial services and products, located mostly in remote rural areas; disadvantaged social groups who have less requirement of financial services; and cost of account operation and dependence mainly on unapproved sources of credit from moneylenders on exploitative terms. Supply-side challenges are: absence of banks in rural areas; inappropriate products; high cost of branch operation; difficulties in deposit mobilisation; non-lucrative profitability; lack of infrastructure in rural areas to provide valued services; and complex documentation formalities for loans and account opening. To overcome these problems and to reduce the rural financial exclusion, rural banks will be the alternative solution.
Rural banks are distinct from universal banks as they function in a niche segment. The differentiation could be on account of capital requirement, scope of activities or areas of operations. As such, they offer a limited range of services or products. The products and services may include a basic no-frills banking account for making and receiving payment, savings product suited to the pattern of cash flows of poor households, credit counselling, simple credit products for individual or cooperative, lease financing for modern agricultural machinery, livestock finance, overdraft facility to cover cash flow shortfalls or to finance short-term production costs, foreign remittance and money transfer facility, insurance policy (life and non-life), distribution of government subsidies and grant under social safety net programme of the government.
Licensing of rural banks for rural financial inclusion will cover our niche segment to financial network as well as work as an agent of the government to participate in development and social safety net programme. The re-finance schemes of the Bangladesh Bank and other organisations can properly be utilised through rural banks for their connectivity with marginal people, who are the target group of various re-finance schemes.  Easy access to credit will encourage our farmers to use modern agricultural tools under lease financing arrangement for individual, group or cooperative which will increase our crop production. Livestock financing will create additional employment opportunity for rural people. Insurance companies have an established network in rural areas and the rural people also feel the need of insurance coverage. So rural banks can promote  insurance policies as their products to increase their number of customers. But to offer insurance products special permission should be given to rural banks because insurance products are not included in regular banks' product line.
There is a huge unmet potential demand for financial services lying in the rural areas of Bangladesh which needs to be satisfied. To meet this unsatisfied demand for financial services, it is worth putting on trial new types of institutions like rural banks which can create a new window for rapid financial inclusion. The concept may have to be perceived from the context of diversified needs of rural customers. Rural banks are the best alternative for trade-off between financial inclusion goals and long- term sustainability.

The writer works in AB Bank Limited as a Principal Officer.
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