Mumbai: Reserve Bank of India (RBI) deputy governor K.C. Chakrabarty said microfinance institutions (MFIs) operate in a segment where the concept of free market doesn’t exist as the poor borrowers need to be protected. Edited excerpts.
You were one of the key members of the Malegam panel that drafted the microfinance report. Based on that, the central government has come out with a draft law. But Andhra Pradesh said it would not go by the central legislation. What’s happening?
The issue which you are raising has nothing to do with our report. The jurisdiction of the Centre and state has to be decided separately. We are not coming into the picture. I’m not enlightened on the constitutional issue but what I know is that if the central law is formulated it supersedes the state law.
Microfinance outlook: Chakrabarty says despite problems, microfinance will continue to remain an important segment of the Indian financial market for the next 10 years. Photo Abhijit Bhatlekar/Mint
That’s exactly what the state government is challenging.
Yes, but I will not comment on it. It’s an issue of constitutional law but we have not created this controversy. The states, being sovereign entities, have the right to take a call and decide what they want to do. There is no confrontation or contradiction.
Are you saying that both the central and the state law can be effective?
Both laws cannot be effective together. I’m not going into the constitutional debate. What we are saying is that if MFIs are well regulated, if they follow the Malegam committee recommendations other types of surveillance either by the Central government or by the state government may not be necessary.
Aren’t the recommendations of the Malegam panel basis of the draft law?
No, the law was there even before the Malegam committee was set up. They might have made some changes but the Bill has been lying there for a long time. The committee has given impetus to bring the Bill to the present form at this stage.
The draft law intends to make RBI as the sole regulator for profitable MFIs.
That’s what I understand.
Why did the panel recommend the interest rate band? Couldn’t you have asked them to announce the minimum rate or base rate that banks do?
Base rate is bringing in transparency. It can be zero also. Interest rates are deregulated and banks are free to set their interest rates. Same was the case with the MFIs. The free market should decide on the interest rates but MFI is one segment where the concept of free market doesn’t operate. This is a vulnerable section of the society and free market is not a very good thing for them. They need to be protected and that’s why we felt the need to put a cap on interest rates. When market mechanism doesn’t work—and it generally doesn’t work with the most vulnerable section of the society—the regulator has to come to their rescue and that’s the principle across the world. I’m surprised when airline fare goes up and the government intervenes, nobody complains. Only when RBI feels that the interest rates are becoming usurious for the small borrowers and tries to cap rates, everybody starts objecting.
In the process, you end up killing the industry.
No. Microfinance is not getting killed because of the rate capping. MFIs are not able to do their business and that’s why they are being killed. Anybody who is not able to do business will be killed. Nobody has complained to me that because of pricing restriction they are not able to do business. There are other factors.
They are having resources problem; the banks are not lending. They are having some restrictions and not able to do the business in Andhra Pradesh which accounts for 40-50% of their business.
Isn’t that 25%?
It’s much higher. You must also understand the nature of the MFI business. These are unsecured loans for the most vulnerable section of the society and if people don’t repay the loans, the business is affected.
Have you been able to convince the banks to lend to MFIs?
I will not say that I have 100% success but there are signs that they have started lending.
What’s the outlook for the segment?
The outlook is good. We feel that for the next 10 years it will continue to remain an important segment of the Indian financial market, especially (when) we look at the fact that the present level of penetration by the banking system is very low but microfinance entities must do the business within the broad framework which have been given by the Malegam committee. If they don’t follow, they might land in problem again and again.
Are you talking to the Andhra Pradesh government to sort out the issues?
No. We made us available to them when we were framing the report. They said if the regulations meet their expectations they may withdraw the state law.
What’s happening on the financial inclusion front?
It’s a difficult task…and will take time. We have started this process only for last three-four years. It’s moving in the right direction. We are pursuing the banks, the civil society, the technology vendors, and state and central governments to act collectively to make financial inclusion happen.
How long will it take?
It’s very difficult to say. We have not been able to remove poverty for the last 5,000 years. Even if we make our best efforts, it will take at least five years.
Are there any numbers to show that it’s working? For the last five years, we’ve been hearing that 50% of India’s population doesn’t have access to banking services. Has it changed?
It has definitely changed.
What is the new number?
At least 74 million new bank accounts have been opened. This number is a little bit messy, because you know one person can have 10 accounts. I don’t know whether 50% of the population has bank accounts or 30%. Even today, in my view, the majority of the population may not have access to banking facilities. A no-frill account doesn’t mean we have access to banking facilities. But the number has increased. Four million people have availed of overdraft facilities; we have about 12 million general credit cards and 22 million kisan credit cards.
But these numbers don’t say anything—out of 74.9 million no-frill accounts, only 11% is operational. Do you know how many accounts have seen at least four transactions since they are opened?
There are many accounts. Transactions are taking place, and you yourself said 11% are operational. You must understand that had we not done this, even 11% accounts that’s operational would not have been there. We have to see how we can push it from 11% to 90%. We know 100% is not possible but don’t say nothing is happening.
There are 74.9 million accounts, but the total outstanding loan is only Rs 198 crore.
That’s OK. Even this would not have happened had this particular scheme not been introduced. Banks have disbursed Rs 198 crore—that’s a great achievement; earlier it was zero.
Why haven’t you been able to push it hard?
Banks are willing to do, but they don’t have the ability to do. If we want to take any product or service to the market, we require technology. And this technology is only three-four years old. Even today, all bank branches are not under CBS (core banking solution). The technology has arrived, but the delivery model has not arrived. Unless we integrate the technology with the appropriate delivery and business model, we’ll have these difficulties. These are teething troubles, we are moving in the right direction and we must continue.
Banks feel that these accounts are not commercially viable.
No bank has told me that. Banking for the poor is more viable then the rich anywhere in the world.
Banks are doing this unwillingly, under pressure from the regulator.
Where is the pressure from the regulator? We have asked banks to prepare a financial inclusion plan but we are not giving any target. We are asking the banks whether they believe it is a business or not. No bank has so far told me that it is not a viable business.
They will not tell that to the regulator.
You tell me why everywhere in the world commerce for poor is considered viable.
Even in a place like Mumbai there are pockets were people do not have bank accounts.
That’s why we started the first commercial bank branch at Dharavi when I was the chairman of Indian Bank. Whether it is rural or urban, the under-privileged poor are excluded.
You are talking about technology as a hindrance and at the same time you are not comfortable allowing the mobile phone operators to tie up with banks.
I have never said that technology is a hindrance. Technology is a facilitator and unless you add up technology, you will not be able do business. I am not saying don’t use mobile technology. In mobile banking, I require a bank and a mobile operator. Our guidelines are very clear, both must converse together and do the business. But if you say e-broking can be done only by a telecommunication company or by a technology provider and that no broker is necessary, the business model does not exist. Banks must use the mobile technology and work in unison with the mobile operator and take advantage of the technology to penetrate the rural area for selling the banking products and services.
You had reservations about State Bank of India’s tie-up with Airtel.
That’s a separate issue. Our guideline is very clear. All technology can be utilized by the banks to take the banking to the hinterland and people who have this technology are free to join the banks.
You have strong reservations about non-banks.
If banking has to be taken to the hinterlands or anywhere, it has to be done by the banks. Banking cannot be done by the non-banks, but non-banks are an important component of our financial system. I don’t say they are less important, but they cannot do banking.
If banks are reluctant to go to the hinterland why can’t you allow non-banks to do their job?
You cannot say that non-banks will do banking. Please understand, banking is a particular activity. If doctors are not going to the rural areas, can you take engineers to treat the people in the rural areas? If banking has to be taken to the hinterland, only banks can take it. Now, if the structure of the bank has to be changed and the business model has to undergo a change, you have to bring in new players but that’s a different issue.
Does that mean in your scheme of things NBFCs should not exist?
No, NBFCs (non-banking financial companies) are an important component (of the financial world). Wherever banks are not able to penetrate, they are doing a good job. If the banks are able to reach out to the people, it will be more convenient for the people, because it will not serve their borrowing requirements alone but their saving requirement, transfer money and offer other financial products and services.
You have recently restrained banks from giving loans to NBFCs by excluding their exposure to non-banks from priority sector loan targets. It’s very clear that you don’t want NBFCs to be around.
The credit to NBFCs is increasing by 44%. We have not said that banks cannot lend to NBFCs. The priority sector target is for whom—the banks or the NBFCs? The NBFCs cannot be a priority.
If the NBFCs argue that they are lending to the priority sector and that’s why banks are lending to them, then there should be a priority sector lending obligation on NBFCs. We are ready to accept that. But there is no priority sector lending obligation for them and their books are not transparent enough to identify whether they are indeed lending to the priority sector. The banks must reach the borrowers directly and bring down the intermediate cost.
In June 2010, you constituted a committee under former Sebi chairman M. Damodaran to look into the customer service issues.
The Damodaran committee has submitted the report. We are processing it and will release it shortly in the public domain.
We will wait for the report, but as a regulator what’s your take on banks’ customer service?
The customer service needs to improve a lot—70% of the population is not having access to bank accounts, 90% population does not have access to bank credit. We have the obligation to take banking to this population. We have to keep a balance and that will partly come through the customer protection law. As and when the penetration improves, competition will intensify and services will improve. At the same time, we also require appropriate legal framework to do that—the consumer protection law. Unless we do that, it will not be possible to provide ultimate satisfaction to the customer.
Banking supervision is also your portfolio. Are you well equipped to supervise all banks?
Yes, we are well equipped but we do not say that our supervision has no lacuna.
How good or bad are our banks?
How many bank failures have taken place in last 10 years? Even in the 2009 global banking crisis, the money markets, securities markets and capital markets in India functioned properly. I will leave it to you to judge how effective the banking supervisor is.
Is our system in impeccable health?
I would say it is in good health.
You have started supervising large banks every year now, which was till recently once in two years.
The supervision of only one bank was done once in two years.
That’s State Bank of India.
I won’t take name of any bank
This is an edited transcript of an interview that was first telecast on Bloomberg UTV on Thursday.