Rooting for growth: How local expansion fuels financial inclusion in tier 2 and tier 3 cities – Banking & Finance News

– By Pankaj Gupta

The Two Paths for Growth

Businesses grow in two primary ways: expanding their current offerings (vertical growth) or entering new markets (horizontal growth). Vertical growth involves enhancing existing products or services and leveraging current expertise to tap into adjacent markets. Horizontal growth means bringing existing products or services to entirely new markets, a strategy that can yield either spectacular success or dramatic failure.

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Building local roots through horizontal growth is critical yet often overlooked. Establishing a presence in new, less saturated markets can unlock immense potential for growth and development. This is particularly true for emerging markets where there is significant demand for products and services taken for granted in more developed areas.

Nowhere is this potential more evident than in India. Picture India’s economic landscape as a grand banyan tree. While its expansive branches represent the major metropolitan areas, the network of hidden roots and smaller branches – the tier 2 and tier 3 cities, and rural areas – are equally vital for the country’s growth. Despite this, the strategy of building local roots by expanding to these smaller cities is frequently overlooked.

Financial Gap in India

India’s growth journey has extended beyond metros to tier 2 and tier 3 cities. In a country with a population exceeding 1.4 billion, the RBI’s Financial Inclusion Index 2024 reveals that only 64.1% have access to essential financial services. On the other hand, the nature of smaller cities are changing rapidly. A BCG report, revealed that 50% of online shoppers are located in small cities, a figure anticipated to reach 60% by 2030. This shift, driven by increased internet penetration, has opened up new opportunities in the local market. However, despite significant technological and economic progress, a considerable portion of the population remains excluded from the financial system. This implies a significant gap that needs to be addressed.

Expanding into these regions offers abundant opportunities for businesses to nurture the unseen roots that will nourish India’s economic future and bridge the financial gap. By targeting these areas, companies can empower local communities, enhance their credibility, and pave the way for a robust, inclusive, and diverse financial landscape across India.

Building Local Roots

The path to horizontal growth through building local roots is fraught with challenges. Establishing a presence in smaller cities is not just about gaining market access; it involves addressing critical financial needs overlooked by traditional institutions with inflexible lending criteria and high collateral demands. These underserved communities can benefit greatly from emerging financial options prevalent in metropolitan areas. Establishing a foothold in smaller cities allows businesses to bridge this gap, offering tailored loan products, flexible repayment structures, and streamlined application processes. This empowerment of local entrepreneurs fuels individual business growth and stimulates broader economic development across the region.

One major challenge in expanding horizontally is the lack of infrastructure and financial literacy in smaller cities. Many potential customers in these areas are unfamiliar with formal financial services and may be wary of borrowing from institutional lenders. To overcome this, businesses can play a crucial role by offering financial literacy programs to educate local populations about the benefits and processes of formal financial services. Additionally, they can develop innovative, localized products that cater to the unique needs of these communities, such as microloans for small businesses or flexible savings plans.

Another roadblock is the high cost of operations in less saturated markets. Establishing branches, hiring staff, and maintaining operations in remote areas can be expensive and logistically challenging. Businesses can address this by leveraging technology to reduce costs and improve efficiency. Digital lending platforms, mobile banking, and online customer service can significantly lower the cost of reaching and servicing customers in smaller cities. By using data analytics, companies can also better understand local market conditions and customer needs, enabling them to offer more relevant and attractive products.

Cultural and social factors also play a significant role in the success of horizontal growth. Local community dynamics, cultural values, and educational infrastructure are crucial in shaping growth opportunities. Businesses must navigate these factors carefully to build trust and establish strong relationships with local communities. This can be achieved through community engagement initiatives, partnerships with local organizations, and by hiring local talent who understand the regional nuances.

By actively engaging with community stakeholders and promoting inclusive growth initiatives, businesses not only strengthen their market presence but also contribute positively to the social and economic well-being of the region. This holistic approach not only enhances business sustainability but also establishes a solid foundation for long-term success in emerging markets.

Once a strong foothold is established in tier 2 and tier 3 cities, geographic expansion across India becomes a natural and logical progression. This horizontal growth lays the groundwork for a more comprehensive and inclusive approach to financial services, reaching underserved populations nationwide. By prioritizing local roots, companies can foster financial inclusion on a national scale, creating widespread impact and contributing to the overall economic growth of the country.

Expanding into smaller cities provides an opportunity to build a strong brand image, cultivate trust and loyalty within communities, and foster long-lasting customer relationships. As the future of India’s growth story extends beyond established metro cities, strategically expanding into smaller markets allows businesses to ride the wave of growth fuelled by demographic trends and economic upliftment.

A Future Rooted in Inclusivity

Expanding into India’s tier 2 and tier 3 cities is not merely a growth strategy; it is a transformative opportunity to support the growth of our nation’s financial landscape. By bridging the gap between underserved communities and accessible financial services, businesses can become catalysts for social and economic upliftment. 

As businesses invest in these regions, they don’t just cultivate markets; they cultivate hope, opportunity, and resilience. The question that remains is not whether these untapped roots will grow, but whether businesses will recognize their potential and nurture them in time.  

In a world increasingly driven by profit margins and rapid scalability, perhaps the most profound growth lies in taking the path less taken—one that is deeply rooted in purpose and inclusivity. After all, the true strength of a banyan tree comes not from its towering branches, but from the unseen roots that hold it steady. 

(Pankaj Gupta is the Chief Business Officer at Godrej Capital.)

(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)