Rural markets present a unique challenge. While the aspirational levels of people there are extremely high, particularly amongst the “rural middle class”, the propensity to splurge on necessities is very low.

Hence, we’ve had FMCG organizations come up with small pouches, telecom companies had affordable handsets and small top ups to offer – even mutual funds have launched daily SIPs/ STPs with very low denominations.

Talking about mutual funds, how do financial services stack up in the overall investment basket of a typical rural consumer?

Financial services, especially mutual funds, have a long way to go in rural penetration. Given the fact that penetration of financial services like insurance and mutual fund is still low in urban India, little needs to be said about its rural reach. Current mutual fund penetration in India covers only about 7-8% of households.

Traditionally, investments are at the top end of Maslow’s financial hierarchy, if you will. A house, farm, consumer durables, property, gold etc are priority for the rural customer.

The average Indian investor, whether rural or urban, still shies away from equity and prefers post office schemes and bank FDs as investment instruments. Most of it has got to do with financial illiteracy than anything else. So for penetrating any financial product, banks in rural areas are the first point of entry.

The road to financial inclusion in a rural household usually follows the path: savings account, fixed deposit, agriculture credit, insurance, auto loan etc. in that order. Investments in mutual funds are towards the end of this path. It’s a journey from “needs” to “luxury” for most rural households.

So investor education is crucial. Also, many Indian investors, especially rural are still skeptical about private financial institutions. A savings account can act as a natural stepping-stone to other financial products. Bank branches play a crucial role in financial planning education in semi-urban and rural areas; they already know the pulse of the population and have the necessary infrastructure.

An incident comes to my mind at this stage. It has always been a sore point that my father was always vacillating when it came to investing in mutual funds, inspite of the fact that I had already carved a niche’ for myself advising people to invest in the same !

One day he told me that he wanted to invest in SBI Blue Chip Fund NFO. I was a little surprised and also a little irritated that he chose to begin his mutual fund investment with some other fund house than mine. On probing why he specifically asked for the fund by name, he told me the cashier at the SBI branch that my father regularly transacts with suggested that this SBI fund was a good investment option. And my father’s conviction was that if the SBI cashier has suggested it, “it must be good” !!

Such is the trust an average Indian places in national banks that it took an SBI cashier to convince my father to invest in mutual funds. I have learnt that in the financial sector trust is more important than conviction, and banks score on this point. And who can give you that comfort more than your banker, especially if you are not aware of financial products on offer.

Having said that, tapping the rural market requires building/ supporting a huge distribution network as well as promoting investor education. Given the current margins for most products, it does not make economic sense to go full throttle on expanding rural distribution network.

Compare this, with over 70,000 bank branches, nationalised banks not only have an extensive branch network but also have the trust of the common man. Most Indians feel their money is safe parked in a nationalised bank than anywhere else. Also, RBI’s thrust on banks to extend credit to agriculture sector under priority lending has brought the banks closer to the rural Indian.

Again, there is a sea change in the mindset of a typical PSU bank manager. He is competing with other banks in the same space, and with the private banks, thereby aggressively looking at diversifying investor portfolios and adding more fee income.

Typically, it is the banks which go into the “Wild wild west”, set up frontiers for the others to follow. While IFAs and national distributors are equally strong in catering to the reasonably financially literate customer, it is only a bank that can lead the way to market expansion in full throttle.

Lastly, one more interesting development is afoot. Technology always throws up opportunities. I am of the strong belief that mobile phones and their resultant technology, ease of use and empowerment of the consumer will lead to the next big “trust factor” propelling financial product sales. Don’t be surprised if you find a person in rural India busy investing in a liquid fund through his mobile phone soon !

I believe the internet revolution will be bypassed pretty soon in rural and semi urban India – it will be the m-commerce revolution which will sweep through. Costs will come down with more users; simultaneously, dependence on the mobile phone will increase.

Rural India is home to around 70% of Indian households. The sheer volume of this market coupled with increasing purchasing power and rise in aspirations makes it a market hard to ignore for any of us. It’s not surprising therefore that product re-engineering and unique marketing and distribution channels are cropping up for “Bharat”. For financial services marketers, the road into the heart of rural hinterland is by tapping banking channels and technology partnerships.

Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.