Rural-urban divide of Indian banking system

June 24, 2014 § Leave a comment

Quartz India is talking about the geographical density of two key financial infrastructure elements, bank branches and ATMs, in India. At the outset, the observation made is that the geographical reach India’s financial infrastructure is not just good, but better than several of the developed countries such as Australia and Sweden. There are couple of gaps in the analysis done here though.

First, let’s take look at the data source used: The Financial Access Survey of the IMF. It is a supply-side survey, i.e. it looks at how good the supply of financial services is in various countries. In addition to the the per unit area data (geographic density), the survey also has data on population outreach. When you look at these two datasets together, you see a much different picture.

Branches comparison

Banking branches per unit area and per 100,000 people. Source: IMF

ATMs comparison

Banking ATMs per unit area and per 100,000 people. Source: IMF

All those countries, including India, who did so well on the geographical density perform poorly when it comes to population outreach. Ergo, even if India has infrastructure that is seemingly closer to reach, it is still not on par with the developed world in terms of financial inclusion of its population. Here it must also be said that these two infrastructure modes are in fact quite outdated (branches more so) and banks in developed countries may be decreasing their emphasis on them over the years.

Rural vs. urban divide

In spite of the above gap, it still seems that India has a pretty good infrastructure base and just needs to work on improving the coverage of population at these outlets. But that ignores the biggest problem faced by India’s banking system (which is briefly alluded to in the Quartz article), the rural-urban divide. With the help of the Branch and ATM data available with the RBI, we can break down India’s banking infrastructure presence.

Rural_urban bank calc

Sources: Census of India for population and area, Reserve Bank of India for Branch and ATM data

That break-up now seems to represent a lot clearer picture of how things stand when its comes to financial inclusion in India. The urban India clearly has a much better network. Although, this will most likely moderate as consumers move towards more sophisticates modes of financial transaction. Rural India, however, is woefully behind. No wonder India Post is pushing so hard to to be a bank and serve these rural areas. In that Quartz is rightly pointing out that in developed countries, people living in rural areas are likely to have much better access to banks than in India.

Note on Urban Area:
There is no direct and latest comprehensive source available which provides the urban built-up area in India. The earliest official source I found was an Urban Development ministry document of 2001, which put urban area at 2.34% of total area. Between 2001 and 2011, the urban units in India have nearly doubled while the large urban agglomerates have sprawled further. Considering this, I have also doubled the urban area to assume 5% of total area. However, common logic will dictate that the area is likely to much lesser than this. Independent sources also put the area at much lower values, although they are unlikely to be comprehensive.


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