BackRBI needs a new monitoring culture
It is time for RBI to keep in step with the change and reformulate its monitoring and tracking indicators
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The Reserve Bank of India (RBI) has finally opened the doors to private banks. With two new full-service banks, 23 in-principle approvals for payments banks and small finance banks and now, on-tap universal bank licensing, India has seen more action in the banking space in the past two years than the past two decades. Though on-tap licensing is a big step for the RBI, it was long overdue. While this step would have made waves five years back, much has changed since, and today, it does not feel like a big-bang reform. In fact, there is criticism that there may not be many takers for these licences now. Two main reasons are given—the exclusion of large industrial houses and stringent norms for priority sector lending and financial inclusion, which will be tougher to achieve given the increased competition through the new niche banks.
To begin with, the outcry about large corporates being denied entry is misplaced. Their exclusion follows the RBI’s objective of ring-fencing risks from large, non-financial entities, an appropriate restriction.
The focus of expectations on big reform should be on the second point—the emphasis on financial inclusion in the business plan, which has been carried forward from the 2013 guidelines: “The business plan submitted by the applicant should be realistic and viable and address how the bank proposes to achieve financial inclusion."
There are two issues here that show that the regulatory mindset is still not as open as it should be. Firstly, why does the RBI feel it necessary to explicitly build financial inclusion into the business plan now? It is true that financial inclusion has been more mandate-led, than demand-led. Banks do not intuitively move towards low-income customers, to rural and remote areas. The continuous exhortation by the RBI to make a business case for financial inclusion is usually met with scepticism from bankers. The RBI has responded by asking banks for innovative, technology-led solutions. Hence, the big reform in the past two years was the birth of payments banks and small finance banks, specifically to meet the purpose of financial inclusion. Isn’t it time to ask whether this stipulation is still needed for all banks now?
Secondly, how is financial inclusion being defined here? With no clear definition in the guidelines, we assume this would mean presence in rural India and compliance with priority sector lending. The guideline on branches at least seems quite anachronistic now: “The bank shall open at least 25% of its branches in unbanked rural centres (population up to 9,999 as per the latest census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence". While this stipulation was there in the 2013 guidelines as well, now there is an additional line: “RBI will, over time, define the mode of delivering banking services that qualifies as rural presence." This is a fuzzy guideline for potential applicants.
The RBI could have gone with the guideline already made for payments banks, i.e. “at least 25% of physical access points including BCs (business correspondents) in rural centres. Further, a controlling office for a cluster of access points should also be established for control over various outlets and customer grievance redressal." There is no reason why the RBI should not use the same approach for universal banks.
In fact, it is time for the RBI to rethink the format of this guideline. Given the comprehensive coverage by the Pradhan Mantri Jan Dhan Yojana across India, it is unclear which centres remain unbanked. Further, we have the upcoming payments banks, including India Post with its reach in the farthest corners of the country. Rather than go with the census, the online registry of BCs being set up by the RBI can be used to see which specific villages/areas need more access points. By creating a benchmark linking distance and population, the list of under-served areas can automatically get highlighted in the database.
Finally, monitoring transaction activity in rural areas would be the key to understanding whether financial inclusion is taking place or not—the mere presence of a branch, ATM or BC is not enough. Rather than mandating the number of accounts/access points, it is time that the RBI built actual usage into its framework and let the banks work out their best channel for inclusion.
When it comes to priority sector lending, the Nachiket Mor committee has already made a number of recommendations to ease the burden on banks. Going forward, the RBI would do well to incorporate data from all entities such as regional rural banks, cooperative banks and self-help groups to see the extent to which these sectors get credit. Rather than set blanket targets for the loan portfolio, it is time for a more granular approach. The data is there for the RBI to use, to target inclusion where it is needed most.
All banks are operating in a digital world now; the RBI must keep in step with the change and reformulate its monitoring and tracking indicators.
Sumita Kale is with the Indicus Centre for Financial Inclusion.
Comments are welcome at theirview@livemint.com
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