Module 8 - Financial Services through State Banks

Networks of state banks or recently privatized state banks with large rural branch networks offer a mechanism for introducing low-cost financial services at scale, because frequently they are the only multiservice financial institutions with an extensive presence in rural areas. Technical assistance to improve management and training can help these institutions fill the gap in financial services for farmers and their households. That said, such support is recommended only if state bank managers and government owners (if any) are committed to following good practice. Given the long history of directed credit and undue political influence, unqualified support to state banks is not advisable. Also, when privatization is the goal, there is a danger that new owners will redirect the bank’s focus away from serving poorer agricultural clients.

State-owned banks that may have extensive rural networks of branches or outlets include agricultural development banks, regional development banks, savings banks, and postal banks. This investment note is also relevant for privatized state banks with significant rural outreach, although often privatization has reduced their rural coverage.

Providing Financial Services

Specialized MFIs have tended to avoid clients who depend on agriculture or live in remote areas, primarily because of the risks inherent in agricultural lending and the cost of maintaining service points in sparsely populated rural areas characterized by cyclical demand. Other financial institutions that operate in rural areas, such as NGOs and credit unions, can offer only a limited range of financial services. They may be unable to supplement income from lending with income from transfer payment and deposit services.

Offering diverse financial services through existing banking infrastructure is more likely to be a viable strategy when the branch network runs efficiently and at low cost. There are increasing examples of financial services being offered successfully to rural populations through state banks, which have taken advantage of their existing branches, assets, customer bases, transfer and remittance services, operating systems, and banking licenses to lower initial and subsequent costs. The shortcomings of state banks are well known, however, and their vulnerability to political influence, associated with a tendency toward subsidized and/or directed credit,⁷  has rightly made working with such banks unattractive for the World Bank and most donor agencies. This investment note does not advocate a return to either unqualified support to state banks or to lines of credit offered through state banks. Instead this investment note explores ways to build on, or take advantage of, their infrastructure, services, and systems to extend a range of viable, demand-driven, and low-cost financial services to agriculture-dependent populations and agribusinesses.