Tensions between extending bank coverage in the country and the commercial realities of banks having to show profits continue to befuddle the sector. Many still see the equation as an either-or situation.

It should be accepted as inescapable that until banks can be confident of showing a profit by extending their reach to less attractive profit locations, they can be expected to continue to resist pressures to do so. What is required is a bottom line solution that is sustainable in the longer term.

Retail bank profits stem principally from two sources. The first is margins on lending. In this regard, there are hopeful signs that the spurt in bank loan volumes in recent years will continue to grow strongly for two reasons.

The first is that trading volumes in the residential housing market have lifted significantly in recent years, with 20 per cent of all housing transactions in the past 20 years having been made in the last five years. With that has come greater demand for housing finance.

The second is that bank and housing finance company finance is steadily replacing a traditional predisposition of Indians to self-finance housing needs either directly through savings or indirectly through informal loans from relations and friends. Accompanying this development is the as yet small, but expanding, market for personal credit cards which is an immensely profitable activity for banks.

Importantly, demand for both housing finance and credit cards is growing strongly in rural as well as urban India which offers the prospect of improving balance sheets in rural locations that previously have had few commercial attractions.

What has received less attention is the profit possibilities for banks in increasing transaction volumes, as the fees and charges attached thereto are a major source of bank profits globally. For the moment in India, transaction volumes remain relatively low even where banks have established a strong presence.

At the national, all banks' level, over half of all urban customers with access to bank branches conduct fewer than two in-branch transactions per month. For those urban bank customers with access to ATMs, the same equation applies. In rural locations the situation is considerably worse with the equivalent percentages being 74 per cent and 76 per cent respectively.

Little wonder  that banks are reluctant to extend their branch and ATM networks into more rural locations, as the infrastructure costs and operational overheads involved are prohibitive.

The situation is a little different when individual banks are considered. For example, in the case of the country's largest public sector bank, SBI [Get Quote], 58 percent of urban customers and 70 per cent rural customers with access to bank branch services avail themselves of those services less than twice a month, while in the case of ATMs, the relevant percentages are 49 per cent in the case of urban customers and 72 per cent for rural customers. As the country's largest private bank, ICICI Bank [Get Quote] experiences similar outcomes.

This indicates that it is the psyche of bank customers generally, rather than a bank-specific customer base, that is at the root of the problem.

Banks successfully extending profitable services to more locations, therefore, needs to be accompanied by a greater focus on boosting transaction volumes. One issue in this regard is remuneration patterns in a country where salaried workers are paid on a monthly cycle, as this obviously is reflecting itself in bank transaction volumes as household budgets are pinned to the remuneration cycle.

One step the government could consider as the single-largest employer is increasing the salary payment frequency to fortnightly. Judging by experience elsewhere, this step would also likely prove popular with employees whose day-to-day money management ability would be more flexible as a result. The government also needs to invest more heavily in electronic connectivity to facilitate higher volumes of debit and credit card point of sale transactions.

Physical infrastructure costs and overheads for banks extending their branch networks to less attractive profit centres also need to be addressed. In this regard, the central government holds part of the solution in its own hands in the form of the India Post network. India Post is in direct competition with banks for depositor funds.

Obviously, the profit possibilities for banks in many locations that are presently unattractive would look very different if India Post were to withdraw from the field. If, as part of that occurring, the India Post office network were opened to banks on a lease arrangement to defray infrastructure costs associated with establishing bank branches and ATMs, the necessary business settings for banks to extend the full range of banking services would come more neatly into place.

The author is Chairman, IIMS Dataworks. The analysis is based on the 'Invest India Incomes and Savings Survey 2007.'