Not entirely bankable ideas

Some years ago, a banker who was discussing why rural branches were not profitable, said, “There is no economic activity in the area that can earn an individual even Rs 10,000 a month. What he or she earns now is enough for bare subsistence.

So what kind of banking experience can we provide and how will we break even?”

This is the first thought that came to mind while looking at the Nachiket Mor committee’s tome on the subject of providing comprehensive financial services to small businesses and low income households.

On the face of it, the aspiration to have an electronic bank account for every Indian above 18 by January 2016 is laudable. The idea is to ride on the UIDAI’s Aadhaar number for this. An estimated 50 crore bank accounts are expected to be added in the next two years.

That’s an ambitious goal considering it has not been achieved in over four decades of financial inclusion till now. Although we may not get there in two years, having that goal will enable some progress. That is welcome. But what next?

As an experienced banker put it: “What is the objective? Is opening a bank account an end in itself or is it a means to an end?”

The report gives the impression that bank accounts are the panacea for every problem in the economy.

The reality is different. Just look at the innumerable cash transactions even among people who have bank accounts. Or the no-frills accounts opened by banks – but the accounts remain non-operational or there is very little churn.

Earlier, experiments aimed at widening financial inclusion — whether through cooperative banks, nationalisation of commercial banks, starting of regional rural banks, local area banks, micro-finance institutions, self-help groups or business correspondents — have each had mixed success.

The committee has recognised this and is realistic in acknowledging that there is no single strategy that can hope to serve the entire country.

Each of these models/channels has value to add and can be complementary.

A NEW ANIMAL

Some ideas proposed by the committee such as the setting up of payment banks and/or wholesale banks seem intriguing.

According to the committee, these banks (to be started as subsidiaries of existing banks) will only offer a limited range of services — either payment/deposit services or lending services.

Therefore, the committee recommends a lower capital base of Rs 50 crore (as against Rs 500 crore for a full service commercial bank).

Critics say the payment/wholesale banks are really a version of ‘narrow banks’ — those that would acquire deposits and just invest them in government securities/treasuries.

At one time, this was proposed as a solution for some banks with a large NPA.

And one RBI deputy governor had even pilloried bankers for practising a different version of the same idea and dubbed it “lazy banking”.

Do we need a new animal for this objective?

Banking experts think the idea of payment/wholesale banks is a non-starter. They point out that regional rural banks were started with similar objectives: as a low-cost option, to be staffed by local talent that would have its ear close to the ground in rural areas.

But this experiment has not succeeded and has actually forced the government to organise a long-running bailout programme by sponsor banks.

There is often a difference between the architecture of an institution on the drawing board and its actual operation — most often seen in cost assumptions.

Any institution started by a government or its banks will inevitably have their staff clamouring for pay-parity with government employees.

These and other such demands have the effect of increasing costs and rendering the experiment unviable ab initio . The recommendations on priority sector lending are sensible and pragmatic. The committee proposes that banks be allowed to specialise in different segments (agriculture/ SME/ Infra and so on) based on their strengths, rather than expecting all banks to do all things.

It proposes to replace the current requirement of lending 40 per cent of credit to priority sectors with a 50 per cent adjusted priority sector lending (APSL) requirement.

This it seeks to do by providing extra weightage for lending in remote locations or regions that have suffered from disparities or to sectors that most need banking services.

It also suggests that the target be achieved and monitored on a quarterly basis, instead of having an annual target.

This will ensure that banks remain focused throughout the year rather than scramble in March every year.

Data shows that one-fourth the agricultural credit is given in March — the maximum (when there is no requirement) — while it is niggardly during the months of the rabi and kharif crop.

The committee argues that given the huge requirement of funds for small and marginal farmers alone, the case for reducing priority sector lending targets may be weak.

It is true that this segment is underserved. But increasing the priority sector requirement will only result in banks being overburdened.

They will do what they do when politicians compel them — just convert existing advances and re-classify them as priority sector loans or lobby for dilution of norms — which will defeat the very purpose of the priority sector.

Look at, for instance, the ever-changing definition of ‘infrastructure’.

Similarly, the district-wise plan to increase the credit to GDP ratio, though well intentioned, may just give another handle to the local IAS official to harass bankers there — or still worse, see the return of the loan melas of the eighties!

To expect banks to throw money when other basic elements of inclusion are woefully missing (roads, power, connectivity, other social infrastructure) is reprehensible.

Let the government first do its bit and create conditions where people can earn more. Then, banks will definitely help — in their own interest. Bank accounts will follow the money.