Tuesday, December 23, 2014
The new banking time in India
The Indian banking is undergoing through some unusual structural changes and naturally the news has been making round about one of those, which is ‘differentiated banks’. As widely reported and circulated, the RBI Governor Raghuram Rajan is a firm believer in the ideas behind it, and thus the central bank’s guidelines come so hands-on this, it leaves no chance unturned to make the keen watcher believe, these new institutions will end all ill in existing system at place.
In principle, the payments banks and small banks are ‘niche’ or ‘differentiated’ banks – with the common objective of furthering financial inclusion. The Small Banks will provide all the basic banking products but will have a limited area of operation – and the Payments Banks will provide a limited range of products, such as, acceptance of demand deposits and remittances of funds, but will have a widespread network of access points particularly to remote areas.
The role of technology and Business Correspondents (BCs) would be crucial for these new banks, like all other existing banks working in rural and semi-urban areas. So, what is new in that? Nothing much. The concept of local area banks came long back in India – and in fact, the Regional Rural Banks (RRBs) took that concept of local banks much ahead than anticipated earlier.
Today, total 57 RRBs have more than 16, 664 branches – remarkably, these banks are still operative at low cost than PSBs and Private Sector Banks in rural terrains – and most of them are in profit. Surprisingly, the RBI has no plan to make these banks more aggressive – and making addition of the Post Offices, as next banking institutions.
The NABARD has for long ceased to offer any noble solutions for rural banking in India, so even in close bearings with the Chicago School of Economic Thought – Rajan should scrimp little bit time and vision to put forth a workable model rather loosing time with too romantic ideas of ‘differentiated banks’ – that appears in its idealistic fold, beating the blue eyed professionals’ flop venture in India, MFIs.
In retrospection, we would get some insights on failures from the distant land of west that has been charming Indian policy makers in recent few years like never before. The ‘hole and corner’ life philosophy of Wall Street bankers and their understanding about the game of banking could be summed-up in few clumsy but truthful words: ‘for them – money is fact, rest all is fiction’.
Time and again, these words came into fruition and brought to the world, such ‘catastrophe’ – not normally to be hatched by someone having capacity lesser than of a double-dealer.
This clears the fog to know that the winds from west seldom come with underlying merits to be known ‘progressive’. This reckoning was although at place in late 1960’s when Indira Gandhi redrawn the character of Indian banking in a single stroke of pen by nationalising fourteen major commercial banks of that time. The inherent aim was much broader and that for creating the culture of profitable Public Sector banking in India – with focus on strengthening the core economy of the country, through readily available banking services hitherto denied.
These banks played their role to an extent and indeed ensured banking among the masses – that exercise could be seen as the biggest financial inclusion drive in India. This was much effective than the Swabhimaan or Jan Dhan Yojna, whose accomplishments would not travel (based on their theoretical positioning) beyond the bank account opening in crores.
Coming to the solution side, the policy debates on banking have to take a cue from erroneously rumoring, the existing banking players in India are wimps – they are not actually. So, selling the already used applications of mobile, low cost innovations would not help now – the real course of correction would be through differentiating between the performer and pretender.
For making financial inclusion effective and rural banking spectrum, free from the unrealistic notions – first and foremost, the RBI should trust more on the RRBs, besides making PSBs and Private Banks less pampered, so they can work and don’t show excuse that the ‘baking is expensive for poor’. They should make profit by banking with the poor, but must stop making BCs, not only poor – but pauper, by offering less than 1/3rd of minimum wage made mandatory by the Constitutional provisions.
The Post Offices have already a huge network at place that covers the nook and corner of the entire country. If the Finance Ministry and the RBI is really serious for going ahead with actual financial inclusion drive – the next banking license should be given to the Post Offices. As not all existing things could be called bad – the time is ripe now to make the plethora of ‘innovations’, truly grounded and coming into terms with the realities of India.
Also an understanding should be at place, the Indian banking is not in nascent phase – and it certainly has some strong economic fundamentals, which giving enough reasons for the banks to get serious about their business prospects. Even those have not returned recently after attending a short-term crash course on ‘emerging economies’ in any Ivy-League Institution (including this writer), can have a logical edge in saying Indian villages have enough too offer for the bank, who will follow the basics of banking there. Not that any show of dramatics would return back well.
The game plan should be to make better course and stay on that. A differently famous, Gordon Gekko from Wall Street (1987), delivered these words very aptly, ‘don’t run when you lose – don't whine when it hurts’.The banking in new time in India has to go that way, it could be said by this moderate polemist!
-Atul K Thakur
(Published in INCLUSION)