Financial inclusion: viable model critical

RBI’s Deepali Pant Joshi says financial inclusion should not be confined to opening zero-balance bank accounts and meeting targets

RBI executive director Deepali Pant Joshi said that financial inclusion can be successful only if banks can approach it as a viable business model. Photo: Abhijit Bhatlekar/Mint
RBI executive director Deepali Pant Joshi said that financial inclusion can be successful only if banks can approach it as a viable business model. Photo: Abhijit Bhatlekar/Mint

Mumbai: Financial inclusion, or the process of spreading banking services to the hinterland, should not be confined to opening zero-balance bank accounts and meeting targets, said Deepali Pant Joshi, executive director at Reserve Bank of India (RBI), in her keynote address at Mints Clarity Through Debate event last week, setting the context for the discussion on Financial Inclusion: The Road Ahead.

The focus should be also on imparting financial literacy among the unbanked and giving confidence to them to use basic banking services, said Joshi. Financial inclusion can be successful only if banks can approach it as a viable business model, she said.

S.S Mundra, chairman and managing director (CMD) of Bank of Baroda; Rajeev Rishi, CMD, Central Bank of India; Nirmal Jain, chairman, India Infoline Ltd; and Chandra Shekhar Ghosh, CMD, Bandhan Financial Services Pvt. Ltd, discussed the subject and broadly agreed with Joshi’s view.

Mint’s deputy managing editor, Tamal Bandyopadhyay, moderated the discussion. Edited excerpts:

Deepali Pant Joshi : In order to make growth truly inclusive, there is a need to broaden and deepen the reach of banking, giving wider access to the financial services. Financial inclusion provides the poor an opportunity to build their savings, make investments, avail of credit, and insure themselves against income shocks and emergencies.

In a dynamic economy, it is imperative that the banking system be flexible and competitive to meet the objectives and demands made by the various constituents of the economy. Looking forward, the new bank licences are one thing that RBI is really looking at to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy by improving access to banking services.

These new banks are expected to bring in new technology, innovative ideas, usher in new business and delivery models, which will speed up and lead to exponential growth in financial inclusion. The business model case to financial inclusion is still a disappointment. We have seen many challenges in implementing financial inclusion. Sustainability and scalability of the business correspondent (BC) model is critical.

Tamal Bandyopadhyay: For most banks, financial inclusion means opening no-frills zero-balance accounts. Had they seriously pursued this, the RBI would not have opened the sector for a new banks with an exclusive mandate for financial inclusion.

S.S. Mundra: About 10 years back, financial inclusion was difficult as banks were expected to do business merely through the brick and mortar branches. There was no other carrier or intermediary allowed to do banking. Most of the villages were not accessible from the nearest town. But since then, regulations have changed and technology has developed. When you have the necessary ground work done, further progress is geometrical.

In 2010, there were 24,174 business correspondents but as of March 2013, the number has gone up to around 221,357. In addition, the number of bank branches have also increased because; in a larger context, people also understand that banking is a commercial activity. While earning dirty profit is not the motive, earning reasonable profit is very important for the larger sustainability of any system, rather it is more important for banking system. This is the first stage that people are coming under the formal banking system. There will be challenges to take them under credit fold and get their investments and eventually bring them under a proper security net.

Rajeev Rishi: It is fashionable to say that public sector banks have not done anything (to achieve financial inclusion objectives). The first thing we did was to get these people on board and now that these people are on board, I am sure that with the direct benefit transfer coming and government to people transactions happening, the process (of inclusion) should become easy. So far, the financial inclusion factors have been expensive and I sometimes wonder why we don’t have an economic viability fund that will enable banks to get resources to deal with the factors preventing financial inclusion.

Bandyopadhyay: Most banks have failed in meeting the priority sector targets (under which banks lend 40% of their loans to economically weaker section). How will they go beyond their mandate and promote financial inclusion?

Rishi: Not all banks have failed in meeting the priority sector targets. Quite a few banks have achieved that. If we are giving a large-ticket loan of, say of Rs.500 crore, to an infrastructure project, which is not in the priority sector, it is done fast but giving 40% loans to the priority sector takes time. It is true that in the recent past some of the banks have faced difficulties in meeting their priority sector targets. But I believe that public sector banks have been responsible in terms of their obligation in lending towards priority sector.

C.S. Ghosh: In the 12 years of service, we have reached a customer base of five million. Out of this, 50-80% are in rural India, especially in eastern pockets, where banks typically do not go and serve. The challenge we faced was in recruiting people who can serve in such areas, where there was no electricity and Internet connectivity and other basic facilities.

Currently, we are mainly providing the credit services and insurance services. But we are unable to provide savings services to the people due to current regulations. We borrow from commercial banks and lend to poor people at higher interest rate because our operating costs are high. If we need to reduce this cost for the borrower, we should be allowed to offer deposit services to customers. By becoming a bank, we will be able to take banking services to all people, where existing banks are not reaching as of now.

Any category of customers has the capacity to deposit some money. But till now, they don’t have access to formal baking services. Also, banks will not be keen to accept deposits as small as Rs.50. A large section of low-income customers still does not have access to formal banking services. This is the segment where we want to tap for deposits. Presently, we are disbursing 80% of our loans to such segments.

Nirmal Jain: We have around 4,000 business points in the country, so we are pretty close to tier V and VI cities, servicing around two million customers. Our plan is to come out with a new generation bank, driven by technology and new ideas. The two key requirements for financial inclusion are the last-mile connectivity and a low-cost model. At the pace at which existing banks are growing, we are not in a position to serve the growing needs of our economy. So, new players need to bring in new capital, ideas and technology. We operate from over 900 cities. We are in to smaller towns and close to rural India. I think financial inclusion needs to be understood both in the breadth of inclusion as well as the depth of inclusion. It is not just opening a bank account and not even just giving loans but offering multiple products such as equities, mutual funds and insurance. Also, there we need competition so that the customer gets choice of credit and competitive price. The gaps in financial inclusion in rural India are more prominent than urban India.

Bandyopadhyay: Do you see financial inclusion as a viable business opportunity?

Rishi: I do. Especially with the government’s initiatives like the direct benefit transfer, I definitely think it is becoming viable. For instance, the business correspondents have become more active. They earn money out of commissions beyond what banks give them in the form of compensation. Going forward, it is going to become more and more viable. The worst time is over.

Mundra: To make financial inclusion successful, there should be a plan to integrate various participants such as commercial banks, co-operative banks, and regional rural banks. It is very important that the business correspondents too become a viable model. Hiring such correspondents from villages like retired teachers will be more sustainable. When we appoint someone as a banking correspondent, we are entrusting him with public money. There is also huge proportion of reputational risk and the banks have to be very sensitive about. It is very important that banks should also have the flexibility to conduct local recruitment. Otherwise, there can be issues of sustainability. But as public sector banks, we cannot go for selective recruitment, we have to have a national recruitment. These are some of the policy related issues we have to sort out.

But it is important that in pursuit of short-term goals—building credit—two long-term goals work culture and credit culture of the country should not be sacrificed.

Ghosh: The cash reserve ratio (CRR) and statutory liquidity ratio (SLR) are cost of funds for the banking sectors. So, if we have a flexible CRR and SLR for this sector (for banks mainly focused in rural India), it will help reduce the costs. There is also a need to balance the credit-deposit (CD) ratio, which differs in different regions in the country.

Mundra: We have to have set goals and targets. At the micro level, CD ratios are very important. There should be normalization in calculating the CD ratios and also the gross domestic product in general which will give a right picture. The public sector banks should be able to recruit local talent, so that the growth can be sustainable.

Going forward, urban inclusion will also be a major issue. Rural inclusion will be easy to achieve since the areas can be mapped conveniently. But the rapid growth in urbanization will pose a challenge.

Rishi: A lot needs to be done in terms of financial literacy. There has to be involvement of local people in the financial inclusion process in rural areas. We need to get people interested in participating in financial inclusion process, and there has to be some way of incentivizing their involvement. This may increase costs, but unless people believe there is some sort of benefit in joining the financial system, why will they do that?

Jain: We need many new players. The new bank licences are a part of it. The non-banking financial companies (NBFCs) are the most logical institutions to become banking correspondents. So, they should be allowed to do that. NBFCs and banks are like railways and roads; they compete as well as complement. Besides, we have to embrace technology faster; we are slow in getting telecom companies in the banking system and mobile commerce. Finally, there has to be a joint effort not only by the public and private sectors but also with social sector NGOs (non-government organisations) that can play a very important role. There has to be a framework, which can integrate all these players. We are in the right direction but we have a long way to go.

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