Mumbai: The Reserve Bank deputy governor KC Chakrabarty has opined that banking or commerce for the poor is always more viable than doing the same for the rich and said this is clear from the no-frills accounts that banks have opened under the financial inclusion programme.
Calling for a radical approach to banking, he said, it is an irony that the poor always end up paying more for the same product and services than the rich. And this is true of banking too, he added.
“My belief is that commerce or banking for the poor is always more viable than commerce or banking for the rich. That’s why corporates get money at 7-8% and the poor MFI borrowers get at 60% interest rate. It is viable provided you have the ability to do business with the poor,” Chakrabarty who oversees banking supervision, rural credit, customer service and the financial inclusion programme said in an exclusive interview to the agency here.
Pointing out that the inclusion banking project has already proved this point right, Chakrabarty said, “in many places, the inclusion banking is already profitable. When they are able to do transactions properly, these accounts will give them profits, and many such accounts are already doing so.”
“What we are saying is that don’t subsidise the poor, but don’t exploit them, because so long as the rich get a thing cheaper, they will not allow that item to reach the poor. And this has to change, at least in banking,” he said.
Pegging the overall cost of financial inclusion project at around Rs 6,000 crore for the entire banking industry, he said, “my calculation is that the entire cost of this banking programme to cover all the targeted villages will not be more than Rs 6,000 crore.”
Challenging banks to prove that inclusion banking is not profitable, he said, “Wherever a bank is able to provide three-four products together, it can make it profitable. When a bank uses proper technology and delivery model and devises saleable products, inclusion banking will easily be profitable.”
What banks should do is to create a structured delivery model through which they are able to interact with the poor and do business with them, he said, adding, “pricing is left to the banks and it will be viable and sustainable. I am sure banks can and will lend to the poor at a much cheaper rate than MFIs.”
On whether the apex bank is happy with the progress of the inclusion programme so far, he said, “We are never happy with anything nor are we depressed. It is not that nothing has happened on the inclusion front. Many things have happened, but we have to scale up.”
Reserve Bank Deputy Governor K C Chakrabarty has called for changes in the rating and reporting standards of banks, saying a bank should not be rated just on the basis of its net interest margin and net profit, but from a non-financial angle too.
“A rating agency should not rate a bank only on the basis of its profit or NIM (net interest margin). A bank must be rated from its social sector initiatives as well,” the senior-most deputy governor of the central bank said.
When asked whether he is hinting at changes in the way how banks should be treated by the markets and market-related entities, he answered in the affirmative, saying, “Yes, the entire marketed related-systems and the methods governing them should change.
“When you analyse and appreciate the performance of a bank, you cannot simply look at the NIM and profit alone, instead you must also look at the purpose of a bank -- intermediation at the lowest cost -- and also the social sector initiatives a bank does, such as how many no-frills accounts have been opened, how many poor people have been funded, how many rural branches have been opened, etc,” Chakrabarty said.
Chakrabarty was responding to query on why he is so cut up with the poor numbers of some of the leading state-run lenders, which reported a massive drop in their last quarter profit.
Without naming any particular bank, Chakrabarty, who oversees banking supervision, rural credit and customer service, said, “If a bank gets a new chairman and then its financial numbers undergo great volatility, there is a problem. We must ensure that it does not happen time and again, because at the end of the day, it is very important to maintain the quality of our banks.”
When pointed out that most of the nearly Rs 9,000 crore provisioning that the nation’s largest lender State Bank had made in Q4 last fiscal could have been staggered, he quipped, “I am not saying the accounts are wrong or for that the book has been cooked. But if everything is alright, why the numbers are so varying?
“My point is that such variations create doubts in the minds of the people. We must bring in consistency, we must bring in unbiased financial reporting. I am only expressing the concern, as the regulator.”
It can be noted that SBI reported a massive 99% plunge in Q4 numbers to a poor Rs 21 crore on the back of massive Rs 9,000 crore provisioning, thanks to a mountain of bad loans and a legion of retirees.
Ironically, SBI had a record of reporting low numbers when it gets a new chairman. When both Janki Ballabh and Omprakash Bhatt became chairmen, the bank suffered huge losses. Ballabh, who succeeded G G Vaidya in November, 2000, saw profit decline 45% in the very next quarter, but only to show vastly improved numbers in the very subsequent quarter.
Bhatt, who was at the helm for five years until this March, also followed the same script. His first quarter numbers, after he took charge in 2006, saw a 35% dip in profit, but only to see a 45% growth in the bottomline.
Chakrabarty’s views are, however, in polar contradiction to his colleague Shyamala Gopinath, who retired on June 20 as the deputy governor, who in her exit interview to the agency had defended the large provisioning that SBI had made, saying there is nothing wrong in SBI choosing to make complete provisions.
“The accounting or reporting standards of banks cannot change. If at all there is an issue, it is about the rise in NPAs and not in other provisions, which SBI made. The Reserve Bank can only ensure that a bank makes all the mandated provisions for all the heads we ask for,” Gopinath, who was the RBI nominee director on the SBI board, had said.
“If a bank chooses to make a one-time provision, it is their choice and there’s nothing wrong with it. The provisions toward gratuity, pensions and other annuities that SBI made in Q4 could have been staggered,” Gopinath had said and pointed out that the directors have no way to know the individual slippages.
“Only the top bank management and its auditors would know the specifics of fresh slippages. The directors, including those from RBI, have no means to know them,” she said.
“Irrespective of the fact who is the chairman, those provisions are to be made in one quarter or other. So it is not about typically flouting norms, but about timing the provisioning. If at all previous chairman OP Bhatt had remained in office, he too would have made these provisions,” she added.
Gopinath, however, admitted “if a bank is hiding its NPAs, then it is something that the auditors and the regulators have to look into.”
On ratings agencies, Chakrabarty said a rating agency must also appreciate the value banks create by taking risks when they fund social sector initiative like funding green projects or gobar gas projects, etc.
“What I am saying is that the society has to change its outlook toward banks. If a bank says it is happy with lower profits and is ready to offer its services at the lowest intermediation cost by bringing down the operational cost, you must appreciate that.
“We cannot just say there should be better green laws and low emissions but just not appreciate those companies which help attain these social objectives and then take a hit on their profits,” Chakrabarty said.