India's 150 million-plus rural "bankable" customers now represent a significant growth opportunity if commercial banks are willing to consider new business models and innovative delivery channels using proven technology solutions.

According to Diamond Management and Technology Consultants (Nasdaq: DTPI), a retail banking system that serves more rural customers can be an attractive business proposition. The World Bank estimates that credit demand in rural areas is approximately Rs 1,330 billion and other studies put that figure as high as Rs 1,500 billion. Furthermore, a large market remains untapped in both the liability (approximately Rs 215 billion) and asset (approximately Rs 1,204 billion) sides of the banking business.

Diamond outlines the scope of the opportunity in a new whitepaper, Building a More Inclusive Financial System in India.

Overcoming Problems of Access to Banking Services

"There are some 32,000 commercial bank branches in India but they cover less than seven percent of the total villages in the nation," said Vijay Mulbagal, a consultant in Diamond's financial services practice in India. "Operating branches in many villages is simply too expensive to warrant the investment, but there are alternatives that can serve the interests of both rural customers and the banks."

Banks have traditionally viewed the higher cost of serving rural customers, their higher credit risk, and a lack of information about customer behavior as barriers to providing greater access. For banks to view rural India as a growth opportunity, a number of access issues must be addressed. Physical infrastructure (electricity, transportation, telecommunications) is a major stumbling block. Regulatory constraints imposed by the Reserve Bank of India, such as the rule prohibiting staffing anyone other than a security guard at an ATM, inadvertently undermine access to banking services.

"There's no one 'right' channel or solution to improve access," said Mulbagal. "But it is possible to come up with an innovative cost-effective approach that creates greater access for rural customers, while satisfying a bank's financial goals."

According to the Diamond report, a combination of banking channels might include:

-- Business correspondents or other authorized groups who could assist with loan applications, nurture self-help and joint liability groups, collect small-value deposits, and deliver small-value remittances.

-- Secure mobile bank branches that visit villages on specified days and deliver many of the same services as more expensive satellite offices or bank branches.

-- Low-cost, custom-made ATMs, managed by business correspondents that would provide a cost effective scalable solution for rural areas.

Encouraging Greater Usage of Banking Services is Possible

Diamond notes that even with access to formal banking services there is no guarantee that they will be used by rural customers. Banks that have succeeded in capturing significant market share in urban environments must rethink their customer service model to match the needs of rural customers.

"Rural customers in particular need the capability to establish micro- savings accounts and withdraw funds frequently. However, the costs of opening and operating an account are high, particularly when you also consider the expense of traveling to a branch, and the opportunity cost of lost wages," said Andrew Sofield, a Mumbai-based Manager in Diamond's financial services practice.

Sofield noted that while banks commonly offer personal loans and credit cards to urban customers, those services are significantly restricted in rural areas, forcing rural customers to raise loans through the informal financial system.

"Even though rural customers may have a good track record of repaying loans, excessive documentation and time-consuming processes discourage customers from going through commercial banking channels," Sofield said.

In its whitepaper Diamond offers specific suggestions for improving the convenience of banking for rural customers. These include early morning or late evening banking hours at rural branches and the provision of signature- ready deposit and withdrawal slips which require thumb impressions.

In addition, Diamond recommends that banks clearly define eligibility criteria and create credit scoring systems that take into account the irregular cash flows of farmers and other rural customers.

Government, Reserve Bank Must Get Involved

Commercial banks can't go it alone, the Diamond report contends. The Central and State governments and the Reserve Bank of India have important roles to play in building a more inclusive banking system. The Bharat Nirman plan to improve transportation and power infrastructure in rural communities is an important first step in improving access to banking services. Rigorously enforcing the Moneylenders Act and educating rural customers about the benefits of using formal banking channels are also necessary. As regulator of the formal banking system, The Reserve Bank of India may have to re-examine some of its regulations governing the licensing of new branches, operations of ATMs and the use of technology.

"Usage and access issues that prevent more than 150 million bankable adults in rural areas from using formal banking channels can be overcome," said Vinod Nair, Managing Partner of Diamond's practice in India. "It will take a collaborative effort by the banks, the government and the RBI to serve the rural market. We think there's a win/win opportunity for rural customers and banks if the banks are willing to take the initiative now."

About Diamond

Diamond (Nasdaq: DTPI) is a premier global management consulting firm that helps leading organizations develop and implement growth strategies, improve operations, and capitalize on technology. Mobilizing multidisciplinary teams from our highly skilled strategy, technology, and operations professionals worldwide, Diamond works collaboratively with clients, unleashing the power within their own organizations to achieve sustainable business advantage. Diamond is headquartered in Chicago, with offices in Washington, D.C., New York, Hartford, London and Mumbai.