Report glosses over practical issues
Source: By DR. N. A. Mujumdar:The Free Press Journal
India’s record of achievement, both in terms of financial inclusion and financial depth, remains poor. Financial inclusion is defined as the spread of financial institutions and financial services across the country and financial depth is defined as a percentage of credit to GDP at various levels of the economy. Nearly 60 per cent of the rural and urban population does not even have a functional bank account. Nearly 90 per cent of small businesses have no links with formal financial institutions. Bank credit to the GDP ratio is modest, at 70 per cent for the country as a whole. In some large states like Bihar, the ratio is even lower, at 16 per cent. This means that a large part of the economy is dependent on the informal sector for meeting its credit needs, with all its adverse consequences like high interest rates. This also has adversely affected savings.
The savings rate as a percentage of GDP has declined from 36.8 per cent in 2007- 08, to 30.8 per cent in 2011- 12. Financial savings of the household sector have declined from 11.6 per cent, to 8 per cent during the same period. Apart from access to formal financial institutions, this has another cause: Absence of positive real returns on financial savings has resulted in a move away from financial assets, to physical assets like gold.
This unsatisfactory situation has occurred despite Indian policymakers’ major initiatives towards financial inclusion. The nationalisation of 14 major commercial banks in 1969 and the subsequent phenomenal expansion of bank branches, unprecedented in the history of world banking, is one such major initiative. Even before this event, the co- operative movement had established a wide network of credit institutions, to which we will refer later, to cater to the needs of farmers and micro enterprises like handlooms and rural crafts.
The Reserve Bank of India ( RBI) had therefore appointed a Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, with Nachiket More as chairman. The terms of reference covered a wide range of issues involved: the vision for financial inclusion and financial deepening, to evolve a set of design principles and develop new strategies for achieving full inclusion.
The committee submitted its report in December 2013. It is a scholarly report, even if at times its erudition overshadows practical issues, as we will seek to show. The key targets the recommendations aim at are: First, by January 1, 2016, every Indian above the age of 18 would have an individual full service and secure electronic bank account. Second, each low income household and small business would have, by January 1, 2016, access to a bank which would be able to provide credit at an ‘ affordable’ price.
By that time, each district would have a total deposit and investments to GDP ratio of at least 15 per cent. This ratio would go on increasing every year, by 12.5 per cent, with the goal that it reaches 65 per cent by January 1, 2020. These targets are sought to be achieved through Aadhaar. Each resident would be issued a Universal Electronic Bank Account ( UEBA) by a bank at the time of receiving their Aadhaar number.
The Aadhaar project has already covered 50 crore Indians and expects to complete the task of issuing to the rest of the country by 2016. In this task of universalising bank accounts, the spread of mobile phones would help. As against only 3 crore fixed line subscribers, telecommunication companies now have 87 crore mobile phone subscribers, of whom 35 crore are based in rural areas. Rural numbers are growing at the rate of 10 per cent annually.
India thus has all the elements for success in place – a wide range of institutional types, well- developed financial markets, a good regulatory framework and authentication and transaction platforms. The committee is therefore optimistic about achieving key goals, like universal access to bank accounts. It also recommends that the RBI should raise the priority sector credit target from its present level of 40 per cent, to 50 per cent.
There are two, what I regard as core issues, which have been glossed over by the committee – issues in the spread of banking on which it could have deliberated, namely interest rate structure and dormant accounts. Both these issues emanate from recent episodes. Blindly adhering to Basle norms of banking has led to the emergence of an inequitable interest rate structure, in which there was cross- subsidisation of high- income borrowers by low- income borrowers. For instance, while corporates could raise money from banks at 6 per cent, even a small farmer was made to pay an interest rate of 12 per cent. It took two decades for RBI to realise this distortion and take corrective measures.
While the committee affirms that access to credit by low income groups and small businesses should be at ‘ affordable’ rates, it does not provide any guidance on what should be the ‘ affordable’ rate. How do you ensure that such distortion in the interest rates does not repeat itself ? The second point arises from the recent experience in the opening of what are called ‘ no frills’ accounts. Such accounts were opened according to targets, but many of them eventually turned out to be dead accounts.
Merely opening an account is only part of the story. It becomes meaningful only when there is credit flow to the account. How does the committee ensure that accounts opened according to the targets would not be dead or dormant accounts? The process of the spread of banking is an exercise which extends beyond banking bureaucracy. One has to derive lessons from the experience of the phenomenal expansion of bank branches in the postnationalisation period. Bringing in the rural sector, which was practically isolated from the rest of the economy, into the mainstream of modern banking, was a stupendous achievement. In this dramatic transformation, the governments, both at the centre and states, the Reserve Bank of India and public sector banks played a concerted role. The techniques employed for extending the reach of banks, the training imparted to the personnel, the travails and tribulations of the whole exercise – all these are chronicled in the book, ‘ Taking Banking to the People’ published by the National Institute of Bank Management, Pune, in 2001. What emerges from this experience is the total commitment and dedication of bankers who worked with a missionary zeal. At that point of time, banking officials were not paid princely sums, alas! That elan, that missionary zeal, is absent from public sector banks today. In fact, most of public sector bankers are suffering from a sort of lending fatigue. Can the Reserve Bank of India regenerate as it were, the same enthusiasm and dedication of public sector banks? The same is the case of the co- operative sector. There are 1,618 urban co- operative banks, 82 regional rural banks ( RRBs), 31 state co- operative banks ( StCBs) and 370 district central co- op. banks ( DCCBs). In addition, there are 92,432 primary agricultural co- operative societies ( PACS). Despite this wide network, its performance in terms of credit delivery is lacklustre because it is characterised by inertia. Mere injection of capital has not worked to infuse dynamism. There is absence of leadership, of the kind provided by Vaikuntlal Mehta, Professor Gadgil and more recently, Dr Kurien of Amul. The committee only recommends training for grooming board members. The real task is to recreate the elan of the co- operative movement.
Mere routine training will not help.
The committee has missed the heart of the problem, namely, that financial inclusion to become successful has to be converted into a mass movement. There are some scattered success stories. Some watershed projects have thrown up local leaders. There are some successful NGOs working for no- profits micro financial institutions ( MFIs). Some NRIs, as well as som inspired Indian professionals have given up their lucrative professional careers to dedicate themselves to rural development.
The real task is to harness these scattered energies and lick them into an institutional shape. Taking the report as a whole, the discussion is rambling and the style involved. The academic approach has clouded the practical issues. Take one more example “The framework to understand various types of banking system designs was the functional building blocks of payments, deposits and credit and constructs two broad designs. These are the Horizontally Differentiated Banking System (HDBs) and the Vertically Differentiated Banking System (VDBs).” Across these, ten existing and potential banking designs are identified.
These are: “National Bank with Branches, National Bank with Agents, Regional Bank, National Consumer Bank, National Wholesale Bank, National Infrastructure Banks’ Payments Network Operator, Payments Bank and Wholesale Consumer Bank and Wholesale Investment Bank”. Even a careful reader is unable to understand how all these types of banks will address the central theme of financial inclusion.
India’s record of achievement, both in terms of financial inclusion and financial depth, remains poor. Financial inclusion is defined as the spread of financial institutions and financial services across the country and financial depth is defined as a percentage of credit to GDP at various levels of the economy. Nearly 60 per cent of the rural and urban population does not even have a functional bank account. Nearly 90 per cent of small businesses have no links with formal financial institutions. Bank credit to the GDP ratio is modest, at 70 per cent for the country as a whole. In some large states like Bihar, the ratio is even lower, at 16 per cent. This means that a large part of the economy is dependent on the informal sector for meeting its credit needs, with all its adverse consequences like high interest rates. This also has adversely affected savings.
The savings rate as a percentage of GDP has declined from 36.8 per cent in 2007- 08, to 30.8 per cent in 2011- 12. Financial savings of the household sector have declined from 11.6 per cent, to 8 per cent during the same period. Apart from access to formal financial institutions, this has another cause: Absence of positive real returns on financial savings has resulted in a move away from financial assets, to physical assets like gold.
This unsatisfactory situation has occurred despite Indian policymakers’ major initiatives towards financial inclusion. The nationalisation of 14 major commercial banks in 1969 and the subsequent phenomenal expansion of bank branches, unprecedented in the history of world banking, is one such major initiative. Even before this event, the co- operative movement had established a wide network of credit institutions, to which we will refer later, to cater to the needs of farmers and micro enterprises like handlooms and rural crafts.
The Reserve Bank of India ( RBI) had therefore appointed a Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, with Nachiket More as chairman. The terms of reference covered a wide range of issues involved: the vision for financial inclusion and financial deepening, to evolve a set of design principles and develop new strategies for achieving full inclusion.
The committee submitted its report in December 2013. It is a scholarly report, even if at times its erudition overshadows practical issues, as we will seek to show. The key targets the recommendations aim at are: First, by January 1, 2016, every Indian above the age of 18 would have an individual full service and secure electronic bank account. Second, each low income household and small business would have, by January 1, 2016, access to a bank which would be able to provide credit at an ‘ affordable’ price.
By that time, each district would have a total deposit and investments to GDP ratio of at least 15 per cent. This ratio would go on increasing every year, by 12.5 per cent, with the goal that it reaches 65 per cent by January 1, 2020. These targets are sought to be achieved through Aadhaar. Each resident would be issued a Universal Electronic Bank Account ( UEBA) by a bank at the time of receiving their Aadhaar number.
The Aadhaar project has already covered 50 crore Indians and expects to complete the task of issuing to the rest of the country by 2016. In this task of universalising bank accounts, the spread of mobile phones would help. As against only 3 crore fixed line subscribers, telecommunication companies now have 87 crore mobile phone subscribers, of whom 35 crore are based in rural areas. Rural numbers are growing at the rate of 10 per cent annually.
India thus has all the elements for success in place – a wide range of institutional types, well- developed financial markets, a good regulatory framework and authentication and transaction platforms. The committee is therefore optimistic about achieving key goals, like universal access to bank accounts. It also recommends that the RBI should raise the priority sector credit target from its present level of 40 per cent, to 50 per cent.
There are two, what I regard as core issues, which have been glossed over by the committee – issues in the spread of banking on which it could have deliberated, namely interest rate structure and dormant accounts. Both these issues emanate from recent episodes. Blindly adhering to Basle norms of banking has led to the emergence of an inequitable interest rate structure, in which there was cross- subsidisation of high- income borrowers by low- income borrowers. For instance, while corporates could raise money from banks at 6 per cent, even a small farmer was made to pay an interest rate of 12 per cent. It took two decades for RBI to realise this distortion and take corrective measures.
While the committee affirms that access to credit by low income groups and small businesses should be at ‘ affordable’ rates, it does not provide any guidance on what should be the ‘ affordable’ rate. How do you ensure that such distortion in the interest rates does not repeat itself ? The second point arises from the recent experience in the opening of what are called ‘ no frills’ accounts. Such accounts were opened according to targets, but many of them eventually turned out to be dead accounts.
Merely opening an account is only part of the story. It becomes meaningful only when there is credit flow to the account. How does the committee ensure that accounts opened according to the targets would not be dead or dormant accounts? The process of the spread of banking is an exercise which extends beyond banking bureaucracy. One has to derive lessons from the experience of the phenomenal expansion of bank branches in the postnationalisation period. Bringing in the rural sector, which was practically isolated from the rest of the economy, into the mainstream of modern banking, was a stupendous achievement. In this dramatic transformation, the governments, both at the centre and states, the Reserve Bank of India and public sector banks played a concerted role. The techniques employed for extending the reach of banks, the training imparted to the personnel, the travails and tribulations of the whole exercise – all these are chronicled in the book, ‘ Taking Banking to the People’ published by the National Institute of Bank Management, Pune, in 2001. What emerges from this experience is the total commitment and dedication of bankers who worked with a missionary zeal. At that point of time, banking officials were not paid princely sums, alas! That elan, that missionary zeal, is absent from public sector banks today. In fact, most of public sector bankers are suffering from a sort of lending fatigue. Can the Reserve Bank of India regenerate as it were, the same enthusiasm and dedication of public sector banks? The same is the case of the co- operative sector. There are 1,618 urban co- operative banks, 82 regional rural banks ( RRBs), 31 state co- operative banks ( StCBs) and 370 district central co- op. banks ( DCCBs). In addition, there are 92,432 primary agricultural co- operative societies ( PACS). Despite this wide network, its performance in terms of credit delivery is lacklustre because it is characterised by inertia. Mere injection of capital has not worked to infuse dynamism. There is absence of leadership, of the kind provided by Vaikuntlal Mehta, Professor Gadgil and more recently, Dr Kurien of Amul. The committee only recommends training for grooming board members. The real task is to recreate the elan of the co- operative movement.
Mere routine training will not help.
The committee has missed the heart of the problem, namely, that financial inclusion to become successful has to be converted into a mass movement. There are some scattered success stories. Some watershed projects have thrown up local leaders. There are some successful NGOs working for no- profits micro financial institutions ( MFIs). Some NRIs, as well as som inspired Indian professionals have given up their lucrative professional careers to dedicate themselves to rural development.
The real task is to harness these scattered energies and lick them into an institutional shape. Taking the report as a whole, the discussion is rambling and the style involved. The academic approach has clouded the practical issues. Take one more example “The framework to understand various types of banking system designs was the functional building blocks of payments, deposits and credit and constructs two broad designs. These are the Horizontally Differentiated Banking System (HDBs) and the Vertically Differentiated Banking System (VDBs).” Across these, ten existing and potential banking designs are identified.
These are: “National Bank with Branches, National Bank with Agents, Regional Bank, National Consumer Bank, National Wholesale Bank, National Infrastructure Banks’ Payments Network Operator, Payments Bank and Wholesale Consumer Bank and Wholesale Investment Bank”. Even a careful reader is unable to understand how all these types of banks will address the central theme of financial inclusion.
No comments:
Post a Comment