The approach of the Reserve Bank of India (RBI) and that of the ministry of finance (MoF) on financial inclusion is distinct and MoF’s approach seems seriously flawed. The initiatives of MoF do not quite add up. The larger strategy towards inclusion is neither coherent nor unified.
RBI has looked at the microfinance sector as a necessary evil. To facilitate this, it has created a category called non-banking financial company-micro-finance institutions (NBFC-MFI) and has almost removed the regulatory confusion in this space. There are aspects of the NBFC-MFI notification that need improvement, but the boundaries have been laid down.
RBI has said that the agenda of inclusion has to be bank-centric and bank-led. It is setting targets and easing operational hurdles. The definition of inclusion entails providing four basic financial services, beyond opening accounts. All banks have a financial inclusion plan that is approved by their board. This plan, in each case, was personally reviewed by a deputy governor. RBI has also removed hurdles in opening branches while retaining a rule on incremental urban to rural ratio; it identified habitations of 2,000+ population and not having banking services. Banks are to be present directly or through business correspondents in these places. There are no limits on interest rates except on agricultural advances. RBI gave banks the freedom to work out all the operational details and encouraged banks to have workable business models.
MoF has interfered with banks to the detriment of their business case. While RBI deregulated interest rates, the Union budget of 2012 added an interest cap and subvention to self-help groups loans in some identified districts. The banks will earn no margins on this portfolio, but they are expected to cheerfully look at expanding the no-profit client base.
In another notification MoF asked banks to open “ultra-small branches” in locations that had 5,000+ population. These brick-and-mortar branches were to operate at least once a week. There was no business plan or break-even worked out. It was an “advisory” to be followed. Soon after this, there was another (possibly unrelated) advisory to close down all loss-making branches.
The banks were experimenting on the outreach possibilities through business correspondents, understanding the economics and mechanics. Each had its strategy, but MoF stepped in and divided the country into 20 clusters and mandated that there would be only one business correspondent in a cluster that would operate across banks. On the advice of MoF, bankers floated tenders for offering business correspondent services. Many firms submitted bids for getting the contracts at ridiculous amounts. One bid even offered to pay the government in return for the services rendered by the firm. We do not know whether this is philanthropy or business, but these bids were counter-intuitive. This space will be in for confusion and litigation in days to come.
The regional rural banks (RRBs) went through one stage of consolidation. RRBs under the same sponsor bank within a state were merged to form a larger entity. In a recent initiative as a part of its reform measures, MoF is merging RRBs across sponsor banks to have one or two RRBs per state. RRBs were expected to address the issue of regional disparity and were touted as a local solution for the rural people. The centralization of RRBs as large entities will make them more like commercial banks. The intent was to make them like cooperatives—local institutions—with a professional touch. As evidence of the ministry’s confused approach to inclusion, the finance minister, in a recent address to bankers at a conference in Pune lamented that the local area bank experiment (in the private sector) was not given an adequate chance—taking potshots at RBI. It was a strange statement to make when RRBs were getting consolidated, taking away the flavour of localization from them.
Each measure by MoF affects the business model and profitability of banks. None of these preceded with a committee or a discussion note. None have a feasibility report. The impact of the measures on the clients and on outreach was not assessed. RRB mergers are happening almost bypassing bank boards and RBI, without much noise.
All banks, including RRBs, are fully computerized, and inter-operability networked. Wage and pension payments for the poor are to be routed through bank accounts. Identification is becoming easier. Mobile networks are spreading. Staffing of the banks is going through a demographic change due to aggressive recruitment of young officers. This was an opportunity to redefine the inclusion agenda, to make a business case for inclusion and also to redefine banking. Unfortunately, MoF is not showing the same maturity as RBI and is wasting an opportunity to demonstrate how inclusion can be achieved in a changing and interconnected world.
M.S. Sriram is a visiting faculty member at the Indian Institute of Management, Bangalore.