Mumbai: Reserve Bank of India’s (RBI’s) deputy governor K.C. Chakrabarty on Friday said the country has failed to achieve financial inclusion despite enabling an environment to include the underprivileged.
Speaking at his first public appearance as a central banker at a financial services summit in Mumbai, ahead of the 28 July quarterly review of RBI’s monetary policy, Chakrabarty also said the central bank would ensure a benign and stable interest rate regime to safeguard the common man’s interest and ensure adequate liquidity in the system.
In the face of high competition in industry, banks, particularly private sector lenders, will have to lower lending rates in the period ahead, he said.
Chakrabarty also said credit outflow is likely to pick up in the coming quarters as there are signs of recovery in the economy, adding that the central bank would ensure adequate liquidity.
As part of the ongoing efforts to promote financial inclusion, RBI plans to introduce new guidelines on the business correspondent (BC) model in the next one month, he said. “(At present), the BC model is too restrictive. RBI is examining the BC model to make it more operative. We expect to come out with our guidelines in the next one month,” Chakrabarty said.
Business correspondents are intermediaries who carry out banking functions in villages or areas where it is not possible to open a branch.
Former RBI governor and chairman of a committee on financial inclusion C. Rangarajan agreed that it is not possible for banks to open branches in every village, but that such problems could be addressed through BCs. “The solution of financial inclusion lies in finding an intermediary. BC is a good model,” Rangarajan told the summit. According to him the repayment ethics of the self-help groups is very high and that the model should be replicated across the country.
Chakrabarty, former chairman of India’s second largest public sector lender, Punjab National Bank, was critical of banking practices relating to opening no-frills accounts for the poor. He pointed out that only 40% of the population has checking accounts, 10% has some kind of life insurance coverage, 0.6% has non-life insurance, credit cards are concentrated among 2% of the population, debit cards are in the purses of 13% of the population. “This goes on showing the amount of business opportunity out there,” said Chakrabarty, noting that only 5.2% of the 650,000 villages nationwide had a bank branch.
“Across the globe, financial institutions are realizing that poor are bankable assets. Yet, we fail to realize that.”
According to a study by the Skoch Foundation, the organizer of the seminar, only 11.1% of 25.1 million no-frill accounts are operational, and that the costs borne by the BCs are not sustainable.
“An analysis of costs based on what the banks are actually paying to vendors (BCs) reveals that the gap at the end of two years is Rs26.25 per account,” the study, headed by Skoch president Sameer Kochhar, found. While better technology was the way out, he said the appropriate technology “for massive financial inclusion has not evolved yet”.