BackRaghuram Rajan says moving away from credit would benefit financial inclusion
Raghuram Rajan pointed out that institutions, which work with the poorest of the poor, have tried to get them to set aside money as savings, before giving loans
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Mumbai: Financial services institutions might want to move away from credit and focus on savings instruments while pushing for financial inclusion, said Reserve Bank of India (RBI) Governor, Raghuram Rajan, on Monday. As part of his speech, the central bank chief pointed out that many successful institutions, which work with the poorest of the poor, have tried to get them to set aside some money as savings, before giving them loans.
“Not only does the savings habit, once inculcated, allow the customer to handle the burden of repayment better, it may also lead to better credit allocation," Rajan said while speaking at an even organized by National Institute of Rural Development and Panchayat Raj.
Rajan, in his speech, spoke on equity, access and inclusion in rural India. As part of this, he explained three approaches on allowing for better access of financial services to more people.
Moving away from credit and focusing on savings related products would be one of these three approaches, Rajan said.
To make formal savings more attractive, easy payments and cash out services will be helpful, he said. The Reserve Bank is engaged in creating a registry for business correspondents who will be giving them the ability to take and give cash on behalf of any bank through the Aadhaar Enabled Payment System, which will also give them adequate remuneration.
The RBI governor also expects cash in and cash out services to improve further with the inclusion of the postal payment bank and telecom affiliated payments banks, which will become operational soon. Moreover, the soon-to-be-introduced unified payments interface (UPI) is also expected to make interbank transactions more efficient, solving the last mile problem.
One other approach is to push for mandates and subventions in the financial inclusion space, to get banks and other financial services institutions to reach maximum number of people. The central bank’s mandate to set aside a portion of their overall lending for priority sector borrowers and to open at least 25% of their branches in unbanked areas are a part of this approach.
Apart from this, the government had also mandated banks to open bank accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY) and give loans to smaller enterprises under the Mudra Scheme.
As there are positive social benefits to financial inclusion that are not captured by the service provide, such mandates are reasonable from a societal perspective, Rajan explained.
“For instance, the higher familial and community status a farm worker gets from starting her own poultry farm and contributing to the family income may, on net, outweigh the costs the bank incurs on making the loan. The bank cannot monetise the status benefits, but a government can decide those benefits are worth generating and mandate them," he said in his speech.
Similarly, mandates such as compulsory account opening help in creating a universal network which will help in reducing leakages when governments want to send direct benefit transfers to intended beneficiaries and also when customers want to use electronic payments through UPI.
However, the short comings in such a system would be that mandates are often pushed by thoughts of political leadership and may last a long time even though their usefulness has ended. Banks themselves may not see profitability in achieving these mandates and may only target an easy customer base which is least risky.
“Finally, some mandates fall primarily on the public sector banks. As competition reduces their profitability, their capacity to carry out mandates and still earn enough to survive diminishes," Rajan said.
Moreover, the cost associated with following mandates is not minuscule. Rather than forcing banks to recover costs by overcharging ordinary customers, or by demanding recapitalization by the government, it would be better to bring the costs into the open by paying for the mandate wherever possible, Rajan said.
“Not only will the cost of the mandate become transparent and will be borne by the authorities, thus incentivising them to make sensible decisions about how long to impose the mandate, the mandate can be delivered by the most efficient service providers, attracted by the subsidy," he added.
Apart from these two approaches, the financial inclusion infrastructure may also benefit from creating more targeted institutions which employ people with requisite local knowledge and direct familiarity with the population they hope to serve. The microfinance institutions, local area banks and the regional rural cooperative banks are all part of this approach, where these institutions combine their local knowledge with stronger incentives for repayment through peer pressure and frequent collection of repayments.
While there have been successes in this approach, there have also been deficiencies which has affected inclusion badly, Rajan pointed out. To counter these deficiencies, the RBI has introduced the small finance bank category, which is focused purely on serving the financially excluded. While the central bank has currently provided small finance bank licences to microfinance institutions and a local area bank, Rajan sees no reason why regional rural banks should not qualify for these licences in the future.
Apart from these, the RBI governor also pointed at examples such as credit information companies, which help in assessing repayment patterns of new borrowers to help lenders in making more informed decisions, digitization of land records which will help in better management of collateral for loans and the Trade Receivables Discounting System which the RBI has licensed to be launched later this year.
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