The 'other' India's dilemma - Views on News from Equitymaster

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The 'other' India's dilemma

Apr 8, 2009

Rural India never had it so good...
Rural India has perhaps never had it so good. Schemes such as the farm loan waiver, higher support prices and NREGS (National Rural Employment Guarantee Scheme) have combined together to put more income into the hands of the rural populace, thus leading to one of the few bright spots in the current economic environment. Indian companies, on their part, have not let this opportunity go down the drain. Quite a few of them are riding out the current downturn with minimum damage by harnessing the enormous potential of rural India. And this is exactly the meat of the report released by the industry body ASSOCHAM (Associated Chambers of Commerce and Industry of India). Titled "The Rise of Rural India", the report speaks about how some companies have managed to grow in a challenging urban environment by increasing their focus on the rural consumer, especially at a time when his pockets have been lined up by the government largesse. It cites the example of auto companies such as Hero Honda and Maruti and how these companies have managed to add that extra zing to their overall sales by scaling up their distribution networks in rural areas. FMCG companies and the rural retail market, where the growth potential is even higher have also come in for some special mention. Although everything in India is at such an early phase of growth, there are certain segments where penetration in the urban areas is a lot more than the rural areas and hence, going rural is indeed the right way to go.

...but banks are still wary of lending
With the rise in rural income, one would expect the banks to turn more eager to lend to the rural populace. However, the figures seem to be pointing in a different direction. As per the RBI's latest statistics on deposits and credits of all the banks in India, India's banks have actually scaled down their lending to rural India during the month of December 2008 as compared to the year before.

On the other hand, lending to metropolitan India has witnessed a sharp increase of 26% during the month under consideration as against an increase of 22% in December 2007. Even more surprising is the fact that while deposit mobilisation in the metropolitan region has witnessed the lowest growth, the same in the rural and the semi urban India has witnessed a sharp rise. In other words, banks are using deposits from the rural and the semi urban regions to lend more in the metropolitan regions. Thus, while rural India may be cushioning the impact of the slowdown, banks may be of the opinion that it has still not turned as creditworthy as its metropolitan counterpart. Indeed, an interesting paradox.

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