Executives discuss the NDA's government's policies and challenges for the banking sector at Mint's South India banking conclave
How much have the policies of the National Democratic Alliance (NDA) government helped in bringing about financial inclusion? What are the challenges ahead for banks in ensuring banking services to the nation’s 1.2-billion population? These issues were discussed at length at Mint’s second annual South India banking conclave. The discussion was moderated by Tamal Bandyopadhyay, advisor at Bandhan Financial Services Pvt. Ltd and consulting editor of Mint. Edited excerpts:
Give us a sense: How much is noise and how much is reality in the financial inclusion space?
Sushil Muhnot (chairman and managing director Bank of Maharashtra)
There was a storm in the microfinance industry (in 2010); what we see now, is things have improved. Simultaneously, one more thing which has happened is that, the banking sector is once again looking, very seriously, at financial inclusion. See, in whatever way the government has said, or in whatever way banks are looking more seriously at financial inclusion, and Jan Dhan Yojana is the first part of it, of bringing in this inclusion.
Now, once we do all this, we find that there are going to be three competitive models which have emerged in the microfinance industry. One is the bank-led SEG model, one is the microfinance-led JLG (joint liability group) model and the third new model which has come up today is the Bank and BC (business correspondent) model, which we can say is the model of the future.
They are trying to bring down the costs in the banking system and trying to attack that. But I do believe that the microfinance model will be very important in the next few years—it’s very stable, has gone through ups and downs, and is now really making progress.
The general recognition is that there is enough demand, there is enough opportunity. The challenge is, “How do you deliver in a sustainable model and on a scale?" Microfinance institutions (MFIs) have delivered on it. But if you want to do total financial inclusion, being a non-banking financial company does put certain constraints on you. You don’t have access to the payment gateway, you don’t get access to savings, you can’t provide a full suite of products—we do it—as MFIs, we do it through a partnership with banks, but, that requires banks getting aligned with you, and I think that sometimes becomes a challenge, because the strategy contentions of the two institutions could be very different, which is why we want to become a bank. The government has had to drive multiple initiatives and it has not happened, and the reason it has not succeeded is that I don’t think we have leveraged all the players who are operating in this space in different forms, whether it is the mobile companies who have the last-mile connectivity, whether it is the banks who are—I call them the telecom towers... who have large funds of money available to give the banking institutions—I think we have looked at inclusion in a very isolated and very fragmented manner. And I think the reason why MFIs have succeeded is only because of the fact that this is our core business.
Samit Ghosh (founder and MD, Ujjivan Financial Services Pvt. Ltd)
If you take Jan Dhan Yojana... I think it’s too early to criticize it. I think it’ll take time for those accounts to become active. The Prime Minister talked about delivering all the gas subsidies of I think ₹ 14,000 crore through these accounts very successfully, and they also realised that it’ll take some time till it comes through. As far as small finance bank is concerned, it’s just about starting. So, I think, as Radha mentioned—it is all our dream to provide the entire, financial services together, not just one side of the balance sheet, which is just loans only, you know. So, I think that will be an ideal vehicle for us, and that’s what we are, you know, going after.
It is the issue of regulation... I think it’s side-tracking us from the main objective, which is to provide micro entrepreneurs financing, which they don’t have—those who need to borrow between ₹ 50,000 and ₹ 10 lakh. So, I think, once it comes through, this definitely will be a great boost, you know, to us. So, I think, suddenly, as the finance minister announced, that, it is the largest financial inclusion exercise, which is being attempted today, through multiple fronts, and it is recognised, whether it’s in the Reserve Bank of India or whether it’s the ministry of finance, it is recognised as one of the top priorities, and that’s what makes us smile.
Rahul Maharishi (region head, EMEA, South Asia, Global One)
Financial inclusion has to be addressed at the macro level and micro level. Macro level is essentially what we are talking about here. Infrastructure, banks, the reach, technology—we’ve heard some great discussion in the previous panel as well. At the micro level, it’s the individuals for who all this is being done. So, financial inclusion is just a basic step because what needs to follow along with financial inclusion is financial education. Because, when you have financial education at an individual level, you have financial responsibility, and that will lead to financial progress. You know, one of the biggest concerns that banks have is, you know, the lending rates and the default rates are substantially high.
For this whole thing to be sustainable, for everyone, the whole ecosystem has to evolve. And, on a macro level we heard the great debate about public-sector banks and private-sector banks—it is actually, all about truly a case of, an opportunity for a public-private partnership here, which is public- sector banks, private-sector banks and even the foreign banks in India, they need to really come together and help cohesive strategy because financially and economically, it’s going to be simply not possible for any single bank, any single sector, to be taking this whole burden of having financial inclusion in India. So, that’s basically where we need to look at it, so it’s just beyond numbers. It’s also a qualitative aspect and that’s what the World Bank report talks about, in terms of the 60% of accounts are still inactive. But it’s a great start. The question is, can we sustain this, and can we really make it work?
Jan Dhan is merely a bank account, Aadhaar is a number, mobile is a device. And therefore, what is all this about? But really, each of them in its own fashion is very integral to the grand plan, the big scheme, the big picture that’s being put out. And along with that, I do want to add one more, which is, apart from JAM, which is SPM in the microfinance world—SPM of course, better known as social performance metrics, but what I’m referring to here, is not that, I’m referring to small-finance banks, the payment bank, the postal banks, and, of course, Mudra. That is my SPM now. So, on the Jan Dhan, to start with—yes, there is no question that this has been an absolutely mind-boggling achievement. People do tend to criticise it at times. The very fact of 140 million accounts being opened in 8-9 months, is something, I think, we all as Indians need to be very proud of. As the government has said over and over again, this is the first step. I call it the plumbing of financial inclusion. It’s like laying the pipes, getting the people connected, into the banking system. Now, thereafter comes the next question of the water flowing through the pipes, which is money. So, through the direct benefit transfer and other programmes, I’m reasonably confident that that too shall happen. So, the jury is still out, I think it’s far too early in the day to take a view, any which way, and, I would humbly submit that—give it time. Give it 10 months, give it 8 months, and then we can have a real conversation around is it working, is it not working.
Kalpana Tewari (member, planning, Postal Services Board, India Post)
That, why are we here, we are not even part of the landscape so far. But I think maybe most of you know us as people who deliver letters. So let me just take one minute to tell you actually we do a lot more than deliver letters. We have been in the business of operating savings account for the last, more than 160 years; we have 32 crore accounts, live; we have about ₹ 6 lakh crore outstanding balance as on date; we are in the business of postal life insurance, rural postal life insurance; money orders have been a part of our product portfolio for as long as the postal department has existed. We have a lot more happening now, I must take one more minute to tell you what technology we are putting in place. We have a network of 154,000 post offices, out of which 139,000 are in rural India. You asked me that our balance sheet is not very good, agreed. You know, why it is not very good is... We have savings bank, we have recurring deposits, a few products in our portfolio, which we have been doing on behalf of ministry of finance—we collect a lot of money, but we have no control over the money. So, it was logical progression for us to move into the banking space, and with investment in technology—let me put it this way, India Post, by the end of 2016, will be totally on a central server-based technology. All 154,000 post offices will be on a single server. On Jan Dhan, all governments, when schemes start, they have to create some noise. Otherwise nobody will listen. We are looking at inclusion; we are looking at keeping this country together; because there are serious threats in those areas. And we have a great presence in National Rural Employment Guarantee Act (NREGA) payment. Today, I think 40—it also varies within the states and governments, such as Tamil Nadu never comes on board— but, major states such as Madhya Pradesh, Chhattisgarh, Andhra and most of the states, we are the major players in payments of NREGA. And yes, we already have technology in place, and we do up to the tehsil level, it’s only beyond the tehsil level that we are not, we are still manual. But, we are getting there, and again, we want to be the part of the financial infrastructure. We need to reach out to people who are totally unbanked today, and that’s where we believe we need to be in place, because we’re an integral part of government.
Rajni Mishra (chief general manager, Bengaluru circle, SBI)
Speaking about competition, there is enough room for everyone, because India is a very large country and we have covered one lakh villages in the last three years after the financial inclusion started and opened about one crore accounts, and who would have thought that the banks put together would will open 12.5 crore accounts? So, that is the volume and that is the unbanked component for all of us, so I think, we should go gung ho, about opening new banks, and, only challenge is financial literacy. So, that is where we all need to focus on. We’ve been opening camps and also strengthening the BC/VC (venture capital) model because, though a large number of BC/VCs have been roped in, and CSPs (customer service point) have been set up—SBI today has more than 3 lakh touch points. In fact, we’ve tripled in the last three years. But, equipping them to handle various transactions—in fact, right now, it is only the very basic transactions which are taking place, so that is where we need to look at how to encourage the customers to bring in more transactions.
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