Guhawati, October 15 2009: ABOUT four years ago, the then Reserve Bank of India (RBI) governor Yaga Venugopal Reddy visited four northeastern states Meghalaya, Assam,Nagaland and Tripura.

It wasn't unusual for an RBI Guv to do so.

But this visit was special.

It was the first time that Reddy got a fix on the reasons behind the dismal state of banking in the North East.

Something that prompted him to depute a key lieutenant RBI deputy governor Usha Thorat to draft a master plan for financial services development in the region on a war-footing.

Never before had RBI taken such a conscious step to shore up banking penetration in Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim.

The challenges are numerous the difficult terrain, the remote habitation zones, the innumerable logistical cum communication bottlenecks, not to mention the insurgency problem.

All have stifled economic and banking development over the years.

It was with a bid to surmount these hurdles that the Usha Thorat Committee advocated bigger IT adoption levels and usage of intermediaries like business correspondents and business facilitators to serve people in remote areas.

And the good news is that banks both public sector banks (PSBs) and new-gen private players have made conscious efforts to place the North East in their expansion map following the RBI's diktat.

Ever since, the total number of bank branches has seen a sharp surge.

From a sub-1900 level as on June 2005, the region now has around 2,100 bank branches.

Besides, banks are taking the intermediary route and using IT-enabled biometric cards to penetrate deeper pockets.

From a purely business perspective, expanding financial business in the North East would have been lucrative, given the lack of banking penetration over there.

Even today, bank branches in the region cover an average population of around 21,000 .

According to RBI's prescription, the average population per branch should not ideally be more than 10,000 .

But issues that blocked banking growth were the lack of economic activities, besides typical issues like infrastructure and insurgency.

The scene seems to be changing fast.

In fact, government funds appear to be pouring in thick and fast into this region.

"This typically enhances the potential for banking business," says Satish Chander Gupta, chairman and managing director of United Bank of India (UBI), which has a better presence in the region with 250-odd branches.

UBI's experience shows the region is a goldmine in terms of low cost current and savings deposits.

Mobilization of such deposits directly boosts a bank's profitability.

So much so that banks have started making a beeline with proposals to expand their footprints in the region.

Big guns like State Bank of India, United Bank of India, Allahabad Bank and UCO Bank will add 55 ranches between them in the course of the next six months to take their collective tally to 1,039 .

SBI has over 550 ATMs in the region and it is adding another 500.It is using intermediaries like Indian Grameen Services as business correspondents.

It has other 300-odd business facilitators too as its extended arm for offering minimum banking services.

The search of low cost deposits has even drawn private players like Axis Bank and HDFC Bank.

Even the tiny Kerala-based South Indian Bank, which has merely two branches in Guwahati and Agartala each has firmed up plans to open four more branches, aggressive by its standard.

And yet, the pace of the development could have been faster, a section of the bankers feel.

"The expansion of banking both in terms of physical presence and via intermediaries hasn't gathered pace the way we would have liked it to," says National Bank for Agriculture & Rural Development's (Nabard) chief general manager in Guwahati, AK Jain.

This is how UBI's Mr.Gupta assesses it.

"It's a difficult terrain to work on.

Credit expansion has always been a problem in the absence of large-scale industry.

But with more regulatory focus of late, the region has started to throw up big opportunities for banks and financial companies.

It's now a matter of generating awareness about the region's potential." Others senior bankers agree to this view too.

The new entrants in the region are typically looking at capital towns.

"This is quite on expected lines as every one need a base first before going into deeper pockets of the region," explains Allahabad Bank chief KR Kamath.

"We are also finalizing plans to have our network in states where we are not present now," he says.

The bank has decided to open its maiden branch in Arunachal Pradesh shortly.

It is also absent in Mizoram.

There many reasons for banks to take the North East seriously.

Here's what Allahabad Bank's zonal head in Guwahati, S Pal Choudhury says: "The insurgency problem has somewhat fizzled out in Assam.

There is occasional trouble in rural belts but the towns are safer nowadays.

Other states are more peaceful now, excepting Manipur".

HDFC Bank's regional head (east) Gulzar Singh seconds the emotion.

"Our bank is present in the major cities or towns of Assam where the effect of insurgency is minimal.

The day to day functioning of the bank is not affected.

We do not have a presence in Manipur." Only recently, RBI took another watershed step to propel financial services in the North East.

Top bankers have always cited that opening of branches in many parts of this region are commercially unviable.

To address this, RBI has offered a viability gap financing scheme for new branches in select places.

This may also be tried out in other parts of the country, according to Usha Thorat.

On top of all this, the new-found determination of the Manmohan Singh government to lift the North Eastern Region to a position of national economic eminence has created the requisite buzz among business houses.

The government has earmarked 10% of the gross budgetary support given to all eligible ministries exclusively for the region.

Moreover, Gail's Rs5,461-crore Assam Gas Cracker Project has just achieved financial closure and this is expected to pave the way for more business in the region.

"The Tea Gardens in Assam, Trade & Commerce in Tripura or Private Coal mines of Jowai in Meghalaya offer huge opportunities for business.

Moreover, economic parameters like consumer markets, investment opportunities, infrastructure, urbanization, trade and commerce, inclusiveness and prosperity of the states offer unique opportunities for business development for the bank," HDFC Bank's Mr Singh says.

HDFC Bank is present in four northeastern states Assam (13 branches), Meghalaya (2), Sikkim (2) and Tripura (1).In the next six months, it is going to add six more to this tally.

Its close competitor Axis Bank opened eight branches in the last 12 months to take the tally to 29 branches.

It has promised to add a couple more by March 2010 .

"The North East is poised for accelerated economic development following the government's 'Look East' policy.

The work of the road connectivity with the Asian nations has already started.

This would greatly reduce the distance and also make cross border trade and commerce with the Asian nations an attractive proposition," Mr Singh observes.

So far so good.

Nevertheless, the Northeastern region needs to address the governance issue to further boost investment flows.

Even, as the Vision 2020 report prepared by ministry of development of the Northeastern region says, diplomatic initiatives with the neighborhood countries needs to be strengthened to foster border trade.

Which is one of the mainstays of the otherwise agrarian northeast economy, as 96% of the borders of the region constitutes international boundaries.

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