Urban-area based private banks have failed to include unbanked rural masses under formal banking fold. Consequently, the failure of private banks to extend banking services to rural areas has enlarged rural-urban financial inclusion gap.
The onset of new economic policy in early 90s brought in many reforms to the Indian banking system. Two major policies were proclaimed in the same year, which had significant effect on the Indian economy. First, there was major financial reform in the financial market and second, the withdrawal of bank licensing policy which had started in 1977 to boost rural financial inclusion. The introduction of financial liberalization through financial reforms opened the Indian financial market for many private and foreign banks to function in the Indian financial market.
During that time, it was expected that the presence of private banks will also help to enhance financial inclusion in equal proportion in both rural and urban India. But evidence in the post-liberalization period depicts that private banks have mainly dominated in the urban, semi-urban and metropolitan cities, where the private banks get opportunities to earn more profit. On one hand, factors such as the enactment of new advanced technologies in the banking industries, easy mode of transportation and communication, easy accessibility of resources raised the banking efficiency and profitability, which encouraged the private banks to open their branches only in urban areas. On the other side, some external factors like the opening of new software companies and the presence of big multinational companies fascinated private banks to operate in the urban areas only.
Statistical table related to banks in India (Reserve Bank of India), shows that from 2005-06 on wards, private bank branches and Automated Teller Machines (ATMs) have increased steadily in India. According to RBI data, there were 3,460 private bank branches in urban areas, 3,841 branches in semi urban areas, 3,388 bank branches in metro cities and rural areas had only 1,312 private bank branches in 2011. Similarly, data related to foreign private banks reveals that there were 62 foreign banks in urban areas, 8 in semi-urban areas, and 242 in metro cities and rural areas had only 7 foreign bank branches in 2011.
Recent data on ATMs shows that, at the end of 2017 December, there were 24,933 private bank ATMs deployed in metro cities, 15,593 ATMs in urban centers, 14,292 in semi-urban areas, and 4,810 in rural areas. With regard to the deployment of foreign bank ATMs, at the end of 2017 December, there were 730 foreign bank ATMs in metro cities, 170 ATMs in urban areas, 17 ATMs in semi-urban areas and only 16 ATMs in rural areas.
On the other side of the economy, the withdrawal of bank licensing policy or social banking policy in 1990s reduced financial inclusion in rural areas. With the removal of bank licensing policy, many rural loss-making bank branches were closed down. As a result of that financial inclusion in rural India declined steadily.
The withdrawal of public bank branches in the rural areas and the high presence of private banks in the urban areas increased the rural-urban financial inclusion gap in India. From that time to till date, huge differences of financial inclusion have been observed between rural and urban areas in the post-liberalization India. Regional Rural Banks (RRBs), Payment Banks, Small Banks, Self Help Groups (SHGs) have worked hard to mitigate this gap but a large segment of rural people are still deprived of access to formal banking services.
After the Punjab National Bank (PNB) scam, the idea of privatization of public sector banks has gained much popularity among bankers and policy makers in India. But the basic question that arises here is that will the private banks be able to mitigate the rural-urban financial inclusion gap by extending the banking services to the rural areas like the public sector banks. Because whatever financial inclusion has been achieved in rural areas is due to the efforts made by our public sector banks. Therefore, further privatization of public sector banks will leave the rural masses to remain unbanked.
Hence, instead of privatizing the public sector banks, it is necessary to bring regulatory reforms within the public sector banks that will enhance efficiency and transparency within the baking system and boost the rural financial inclusion further.