Credit for the poor has to be looked into as a business proposition, said J.M. Garg, chairman and managing director, Corporation Bank, who was speaking at the Mint Clarity Through Debate event on Inclusion: Key to Growth for Banking and Industry. Other speakers at the debate, who included K.V. Eapen, joint secretary, Union finance ministry; T.T. Srinivasaraghavan, managing director, Sundaram Finance Ltd; S.A. Bhat, chairman and managing director, Indian Overseas Bank; M.S. Sundara Rajan, chairman and managing director, Indian Bank; A. Vellayan, chairman-designate, Murugappa Group; Nachiket Mor, president, ICICI Foundation; and M.F. Farooqui, principal secretary, ministry of industries, Tamil Nadu government, also aired their views on this and other related issues. Mint presents the second part of edited excerpts from the discussion, held in Chennai on Monday and moderated by deputy managing editor Tamal Bandyopadhyay:
Garg, you told us that lending to the poor is a lucrative business one can do it. But why aren’t you doing it? What is the inhibiting factor?
Garg: I have stated earlier also that this is an area to be looked into as a business proposition. So, we have started creating that awareness among our staff members and I am sure we will be able to scale it up.
Now, the problem that we face is in terms of scalability of technology because, as Sundararajan was mentioning, we have in the six lakh plus villages about 30,000 branches. Reach and scalability - that will be one of the issues that we have to address. And, we are trying to do this through service providers like FINO, Integra, Little World, etc., and the problem is, to what extent can they serve the entire financial sector. We’ll have to scale it up and we’ll also have to develop new technologies. Maybe, we will have to migrate from the existing technologies to mobile banking and that would help us to reach out to the masses.
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60-70% of the people do not have a bank account, and we started this process (of financial inclusion) from 2005. Now, we’ve done a quick calculation (of the cost) of providing the same model of branchless banking, and what will be the total cost to the exchequer. They (the exchequer) have to provide it in the initial stage. It could come to roughly about Rs3,000 crore, not more than that. When we can waive agricultural loan to the extent of Rs60,000-70,000 crore, this is a very small amount. And, then, to maintain this in the initial period of 2-2.5 years to (achieve a) break-even, the cost cannot be again very high. It could be roughly Rs600-700 crore per annum. So, if this is the total cost which the country has to incur for financial inclusion, as a first step towards inclusive growth, I think that is where we should start.
And as I said earlier, the structure itself of the entire process to be delivered, the delivery of this entire process and the product, if you have to ensure (these), then we have to (take a) re-look at the entire model and the structure and redefine the roles of the various agencies including NABARD and SIDBI.
Bhatt: I think we should start in every place with FLCCC (financial literacy and credit counselling cell). We should try to change the mindset of our own people to make them credit-savvy as far as the smaller loans are concerned.
Subsequently, we should start forming small groups because what’s happening in the majority of the (cases where) small loans (are extended), if one activity becomes successful in a village, everybody wants to go for that. (Take) for example, a cycle shop if one person becomes successful (in running a cycle shop), then you have a number of people who want to go for a cycle shop. And, ultimately, the person who was doing well also fails. So, for me, the formation of the group, identification of the activities you can’t take in that particular village (are the first steps in a financial inclusion process), subsequently, (there is a need to) go for some kind of a forward as well as backward integration.
If you are in a position to do all these things at the village level, in each and every village separately of course, for that we would require some kind of a manpower, we would also be requiring somebody who will be able to counsel which can be achieved through FLCCC, I think it will be a very successful model for financial inclusion.
Sundara Rajan: Actually, it is feasible and it is possible because more and more banks are also doing what is called the core banking solutions. They will be able to take the technology to the people also. Increasingly, we need to share success stories, induce people (financial institutions) to give loans, (and then) it is possible. We’ll be able to do it.
Mor: Actually, there is an implicit, fairly large subsidy today to the banking system. And my understanding is, of course, now interest rates have fallen a little bit, but historically, we have maintained the highest difference between the risk-free rate, which is the government rate and the savings account rate in the world. So, (it is) a very large amount of money that the banking system is getting. My understanding of the original intent of that was, this is an attempt, an understanding by which you will do priority sector lending. This side, you’ll get a large amount of money, on the other side, you’ll spend it on the priority sector.
I think that the practical problem is not money. I think the reality is indeed that one has to go out and serve in rural (areas) and let us not forget the urban areas. It is not as if Dharavi is fully served, despite being in Mumbai, where so many banks have headquarters and operations. Perhaps, one challenge may be that there needs to be more interest at the top, at the senior management team (at banks) as to what is going on, (and the need for) discussions on this… My own experience in the past is that whether with the regulator or generally in our own boardroom conversations or IBA (Indian Banks Association), this rarely finds mention. We spend most of the time discussing credit card debt, mortgage issues…
Beyond that, I think there is a challenge that the current staffing structure of private banks, government banks is such that it will be hard to persuade them to go to a remote location-either Dharavi or (any other place in) rural India.
Financial literacy of the customer is a issue, perhaps, but a limited one. My experience of working with this organization-IFMR Trust, on the ground in Thanjavur, is that customers know what they want and we are not seeing obligate behaviour on their part.
The problem should be solved at the district level. Lead banks, for example, should collaborate with business correspondents, local NGOs—whatever the structure is—within the next six-eight months. This country has seven lakh villages, a district has only 2,000, maybe 1,500 (villages). Already, the lead bank is quite present there. I think we can make fairly rapid progress (by dealing with problems at the district level), rather than try to solve this at the national level. I see it very much as a challenge that we sit here and we say ‘here are the six districts. I will take responsibility for them and here is how I will make it actually happen’.
Very few industries go for financial inclusive growth. What can the industry do?
Srinivasaraghavan: Rather than answer the general question, I will talk specifically about what we do. I make my living financing semi-literate, sometimes, illiterate truck-drivers. That’s what we’ve done for 55 years. And, give or take, about 75% of our business comes from semi-urban (areas) bordering rural India. That’s where our customers are.
Now, the problem is that, on one hand, we hype inclusion, but on the other, …we systematically destroyed this growth of entities called NBFCs (non-banking financial companies). They (NBFCS) were typically the equivalent of regional rural banks. They understood the dynamics of the population, the culture within a radius of 200-300 km. But, in one swoop, we wiped out 45,000 of those. Today, we are trying to build micro-finance institutions to deliver credit to the same set of people. Because of…two or three high profile crooks who took people for a ride, …an entire industry was damned.
NBFCs are a small number, which are still, to my mind, a significant business model which is that of a wholesaler-retailer—banks being the wholesalers and NBFCs being the retailers—you can reach credit to the far corners of the country. But, the will has to be there. …there are enough regulatory mechanisms in place to make sure that the companies behave. They are no more or no less honest than any other business.
Vellayan: I would like to share with you something that we are already doing in Andhra Pradesh and Tamil Nadu. We have about 500 stores, they are called ‘Mana Gromor’ in Andhra Pradesh and ‘Parry Meyyams’ in Tamil Nadu. Basically, they look at what is needed by the rural India. It is water management, soil management, mechanization and output marketing. Now, if there is a partnership and, in finance, we partner with Indian Bank in Tamil Nadu and State Bank in Andhra Pradesh. In all other areas, we partner with Mahindra for mechanization, we partner with a number of other companies for soil management. So, actually, we have 5,000 farmers attached to each store. Every Tuesdays, we take four trucks and tents and go and set up camps in the villages. Then, we offer these services. And you will not believe, the kind of response we have: we get Rs10-12 lakh per day and it’s all cash. If you give them inputs on water management, finance, mechanization and input and output, you’ll find that these guys will be able to earn 50-60% above what they are earning per acre of land. And that is what really needs to be done.
Are there plans by the Tamil Nadu government to join hands with banks and industries to spread financial literacy and awareness? Are you already doing it?
Farooqui: Essentially, Tamil Nadu government is very progressive and we are ourselves in the process of working with the banks and devising (new products). Now we have, for example, health insurance. The government of Tamil Nadu has worked out a health insurance product for the benefit of the poor. And that is how you deal with many other things.
If we talk only of, let’s say, opening account and extending credit, we need to really see what the villagers want. The product needs to be devised to meet their requirements.
We have been working very actively, I think, in establishing small SHGs (self-help groups). We have extended a loan of about Rs5,000 crore.
We must recognize that financial inclusion is a profitable venture. In the global downturn, the world is looking not at the Western and the developed countries for the growth in future; they are looking at the poor and developing countries and emerging markets as the drivers of the growth. In India, one of the major drivers of the growth is going to be agriculture.
Mr Garg said Rs3,000 crore is needed for financial inclusion. There is one report which says that the model of business correspondents or banking correspondents is faulty in its structure because for every account, the banks are incurring Rs26 loss. You give so many subsidies in different sectors, why don’t you take care of this?
Eapen: I would almost 100% agree with you. We should, perhaps, launch financial inclusion as a national programme. This is necessary right now because… and also, the conditions are right at this point of time. One of the successes in the last few years is supposed to have been the National Rural Employment Guarantee Scheme. It, by itself, has increased financial inclusion because it is mandated into the scheme where payments are made through the job cards through the bank accounts. Both the NREGA scheme as well as other schemes like the pension scheme, are all taking place through the (bank) accounts, which has sort of created the base for a take-off for financial inclusion.
The problem really now lies in the fact that… it is still not a viable venture in many ways. One of the major issues, for example, if you just take the business correspondent model is the cost of the instrument, which the business correspondent uses. It costs around Rs25,000-30,000 to manufacture this instrument. I know for a fact that some of these banking correspondents who use this instrument have applied for credit to the banks to manufacture them but the banks are not willing to lend. But they are actually working for the banks using these instruments. So, it will require …a commitment in terms of some money from the government.
What are the components (that go into the implementation of the financial inclusion programme), are we going to use the correspondent model or any other model (for the implementation of the programme), all this has to be worked out. But, everything needs to come together at one place.
How do we surmount this problem and get into action? How do we approach this problem though microfinance institutions, SHGs, bankers or using the banking correspondent model?
Eapen: I think you have mentioned all the alternatives and they are not necessarily contradictory. Each of them can be tried. One of the things that we haven’t tried too much in India so far is the mobile telephone technology. I know there are a couple of people here who are actually interested in using that kind of technology. That is what would be my suggestion; the next big thing we should do is use… mobile penetration in this country is quite high… we should use that for financial inclusion.
Farooqui: It should be a combination of product and technology- because you make specific products that will deal with the problems of those people who are not included now and technology includes mobile banking.
Bhatt: I would go with the cooperation of the banks and NBFCs.
Srinivasaraghavan: I think it is a continuum. I don’t think any one set of approach can deliver financial inclusion. If you want last mile delivery, all of these approaches… need to work in a continuum and then it will happen.
Garg: All of us would have to join together and as said earlier, it has to be a priority and a national issue.
Vellayan: I think banks should collaborate with industries and NBFCs. 50% of the money should be spent on financials, 50% on development activities.
Sundararajan: A coordinated approach.
Mor: I think there are no fundamental barriers. There is the need for each of us to go out and say, ‘I would take this district, I will get it done.’ It is a matter of six months to one year.