Studies show that the overall effect of micro-credit is not essentially income enhancing but mostly in income smoothing, in making credited people more capable to buy goods or services that they cannot otherwise afford.
In all the ideas of financial accountability, financial inclusion is most important. Nevertheless, the policy circle represents it awkwardly and measures it by the number of new enterprises created which is flawed. The primary concern of the lending should be to target the prepared individual, who is capable to run a business and nurture entrepreneurship. In most cases, beneficiaries of the institutional credit do not use it for the sake of enterprise or for the purpose of income-generation.
Rather they spend credit given to them on conspicuous objects or for household expenses. Studies show that the overall effect of micro-credit is not essentially income enhancing but mostly in income smoothing, in making credited people more capable to buy goods or services that they cannot otherwise afford. The need is to create more micro-enterprises through the credit disbursement, but that requires the Indian financial sector to be more robust and responsible.
The wrong driving notion of ‘innovation’ is sabotaging the basic aims of banking in India. The point should be that we need something more than buzz of mobile banking and business correspondents. Giving prominence to undeserving ideas causes as much irritation as seeking ‘financial inclusion’ through the ambiguous financial products like-Participatory Notes and Sovereign Wealth Funds. The grim fact is, banking in India has failed to either catch the best spirits of socialistic planning or the goodness of open economy.
One of the big issues of financing in India is the ‘credit culture’. This is not strong and effective. In blurred vision of lending and unethical faith in not returning the credit makes the credit culture highly unsustainable. The proof of ‘Priority Sector Lending’ holds primacy among those India’s beautifully made constitution has absorbed this to ensure fair credit to the weaker sections and enterprising activities at bottom level.
Unfortunately, it was totally mistaken by the banks operating in India as guard against any extra demand of inclusive banking. Except Regional Rural Banks (RRBs), no other banks in India completely follow the constitutionally enforced PSL-the commercial banks lend as required, 1/3of the total credit on easily sourced fictitious enterprises or by buying the loans of RRBs or from some functional cooperative banks.
Even this worst comes up when RBI makes tight effort of attainment.
Though the small businesses are important, they cannot be a major source of job creation. They create jobs but many walk away from business. Growing or established businesses can create sustainable jobs. In that case, small local banks such as RRB benefit by lending to SMEs to keep them floating. If business thrives on bank credit, naturally the lending banks will be equally benefitted. Private MFIs have failed to function in desired competency, as their working model is not supported by the rationale of inclusiveness.
The static structure of large banks is a disadvantage when it comes to offering micro-credit. For SME credit in an example, an important consideration is the kind of structure which enables them for credit.
That is less transparent and recede chances of positive lending. In effect, the engines of growth/SMEs starve for funds. Here the basic argument is India’s large banks are relatively bad in giving customised loans. They ignore the marginal utility of the time and specific financial requirements, which matters earnestly to the small local customer.
This tendency mars the idea of inclusive banking, whatever the size, Indian banks could reach by having segmental business focus, but it would be not able to hide the unrelenting follies at ground. The local area banks, like RRBs are still doing well and could do better, if given them the parity as equal as the PSBs are getting from the government and regulators. The smaller banks can serve local populations much better and here requires lot of work to be done.
In popular perceptions, nationalised banks are trusted because these could be identified with the government. But the concern is their service levels, which is not good in rural areas. Another grave trend is not having the private sector banks’ concentration on agri-business or in promoting the farming. It’s very surprising as all second generation Indian private sector banks have presence in tier-III&IV towns.
The RBI has to act fast in making banks more open for compliance and also infusing the spirit through policies. The understanding should be that ‘social concern’ doesn’t make any adverse impact on core banking businesses. At this point of time, India banking cannot afford the ‘static mode’ in which Western financial institutions are addicted to function. Comparatively, Indian banks are stood with better chances to thrive on the huge domestic demands; this way the aim of ‘financial inclusion’ will be also meet.
But the RBI has to work very hard for this as Indian banks follow no voluntarism most of the time. After the long spell of policy inertia, the RBI is finally making plans to allow more licenses to new banks but that alone will not guarantee its entering of bonhomie with the finance ministry. Still they stand at distances while discussing the fate of economy. This dumps the prospect for change.
Progressing into 21st century amid volatile global financial scenario, Indian policymakers must heed on the larger questions related to the economy.
It will be nothing more than ‘complacency’, believing that Indian economy has really overcome the harsh outcomes of economic meltdown. With a directionless capital market, almost fridged insurance sector and passive banking structure, this claim will not go too ahead. Lately, the realization about mishandled policies and passed time would be more rational. Also this will help in dealing the situation, which is no longer as rosy as it was before 2008.
The double digit growth is now a distant dream and even for a timid target, struggle has to be intense!
Atul K Thakur
(Published in Governance now on February05,2013)