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
Email: summertickets@gmail.com
(Published in INCLUSION)

Self Help Groups: Catalyst of Microfinance Movement

Self Help Groups {SHGs} programme is the flagship microfinance intervention of NABARD which was launched as a pilot project on February 26th 1992 and deserve to be considered as a landmark development in the banking with the poor. In its part, RBI accepted most of the major recommendations and extended the SHG-Bank Linkage Programme beyond the pilot stage to as a normal business activity of the banking sector.
Now it’s a proven reality that the Bank Linkage Programme is one of the most cost effective components of microfinance movement-major change that it bestowed upon the Indian financial sector that banking with the poor is no longer remain an impractical and unachievable idea,it's a real accomplishment in the rural segment of banking.

This pragmatic initiative has immense growth potential for disadvantaged section that hitherto remained secluded from earlier poverty alleviation programmes. Despite many impediments, the programme has made remarkable socio-economic impact on empowerment of women in rural areas which considerably changing the institutional landscapes with better entitlement of enterprising poors. In last two decades, it impacted the lives of eight crore rural people across the country besides this, the creation of SHG has enabled the banking system to expand their footprint and to build a quality credit portfolio with those segments of the unbanked rural population.
Infact broadening of SHG is highly process specific and possess lot of room for innovative practices-beyond micro-savings and micro-credit, other financial services like micro-savings and micro-credit, other financial services like micro insurance, micro-remittances and micro-pension etc are presently placed in nascent stage but surely they would appeared more resonant in future ahead to cater the diversified needs of rural poors.

Unprecedented response of the SHG-Bank Linkage Programme facilitated by NABARD is truly acting as movement with a huge back-up of excellent micro finance clients. Complete attainment of universal financial access is most urgent thing as next course of action,as its proved now enterprises can only effectively thrive on institutional finance-here it’s also equally imperative to rationalize the private MFIs exorbitant interest regime.
Studies shows that microfinance services helps in poverty alleviation through its broad canvass of insuring equitable growth and spreading the programme in rest India to match its strength in southern states. In last two decades, SHGs have emerged as pivotal route of micro financial activities-as on March 31st 2009, banks credit outstanding against 42.4 lakh SHG stood at Rs 22,679.85 crore-on an average, this accounts to about Rs76, 000 per SHG and average loan per member stood at Rs5, 400 which is still very low in perspective of huge challenges.

The institutional achievements of the SHG-Bank Linkage Programme are most remarkable in terms of participatory and sustainable poverty alleviation and reaching to the developmental goals. On the social indices front; non-financial activities of SHGs are very crucial in attainment of actual socio-economic inclusion and empowerment. As government is contemplating some new regulatory changes to boost the microfinancial scenario, it would be naturally in priority to see more attention on SHGs increasing role in developmental framework. Presently few financial institutions except Regional Rural Banks {RRBs} and to some extant Co-operative banks, is taking optimum interest in empowerment of SHGs-this is a haunting concern as the marginalization of SHGs would dampen the entire euphoria of microfinance.

For banking sector, role of SHGs can be modeled as potential vehicle of financial inclusion in different capacity-from a potential client to a Banking Correspondent {BC}albeit sincerity must be ensured, so merely treating them as buzzword wouldn’t be suffice. Only genuine action and stout determination for socio-economic turnaround can lead this initiative to the crest of activities in rural financing. At any policy maneuverings, it must be clear in the mind of its architect that many unique challenges have to reckon with at next level of its execution-which can be addressed only through the innovation and constructive enterprise.
Atul Kumar Thakur
April 24th 2010, Saturday, New Delhi
atul_mdb@rediffmail.com

March of Universal Financial Access

Debate is still in full swing for attaining the goal of financial inclusion in stipulated time-frame to usher India in a new age of institutional finances. The rudimentary goal of financial inclusion in Indian perspective is very compatibles with the long sought-after necessity of expanding institutional financial services to the unreached segment of society. It would be imperative here to see that despite witnessing spectacular success with regulated inclination of Indian financial sector still a considerable pool of population is out from its core ambit.
These financially untapped common masses are not only missing the access of formal banking services but they are also deprived from a proper entitlement which eventually outpaced them from mainstream and leads them in the trajectory of exploitative money lending markets.

Such conditional fall leads them to the financial viciousness and alarming indebtedness that altered the course of their lives; for checking these sorts of unfortunate developments, institutional financial delivery at rational interest rate would be a plausible panacea. As the maladies of indebtedness being evident among the farmers, it’s an urgent need to combat these problems on two different front; first to raise the reach of institutional financial services among untapped groups with avoiding the practices of exorbitant charges as some of Micro Financial Institutions (MFIs) are indulged in similar practices and second to offer timely credits for productive purposes instead for consumption.
Models of Regional Rural Banks (RRBs) and co-operative banks could be the fine example for newly emerging Micro financial institutions by lessening their operating cost through technological innovation and adaptation to local conditions and wisdom of practices.
Movement of Universal Financial Access or UFA is a very comprehensively shaped idea that drawn and being propagated by the distinguished banker Mr. Sanjaya Bhargava who left his illustrating full time career for activism of financial inclusion. The basic idea of UFA is meticulously woven for the conditions which are frequent in bottom level of banking practices in India.
Today lack of entitlement primarily fuelled by the low penetration of formal banking and other services among the marginalized section especially in rural areas. UFA movement is trying to bridge the gap between actual demand and supply scenario by tracing the operational loopholes in existing Micro financial institutions and retrieving solutions for better materialization of financial inclusion.

Indeed the conceptualization of financial inclusion by UFA evangelist introduces a new chapter of innovation in Indian financial sector entrusted with broad welfare aims. The drive for universal financial access becomes more vital especially it’s concern with languishing fortune of farmers and others from the bottom of pyramid who grossly left untouched from the great Indian growth story, so its focus area is adverse tantamount generated from unequal growth agenda.
UFA stressed for appropriating technological innovation in the operational domain by the financial institutions in rural areas to curb the cumbersome expense on its service delivery. Revolution in Telecommunication sector is the finest available example before the financial institutions to spread their products at affordable price in hassle free environment.

Consequently with such approaches Telecommunication today enjoying the most respectable position in Indian business and its bullish impact could be visualized any where,spectacular monthly addition of four million subscriber bases with growing Average Revenue per Users(ARPU) rate signaling the makeshift of a sluggish sector into a full bloom arena.At policy level government is too looking serious to attain the goal of financial inclusion by lending directives to Reserve Bank of India,to accommodate the hitherto unbaked persons.
Social schemes like NREGA, Indira Awas Yojna, Self Help Groups etc;are helping the conducive proceedings of financial inclusion plan since the all transactions has to be dealt only through the banks now that giving a lease for institutional financial awareness.

Unique Identification Programme (UID) is an other initiative of government under the visionary chairmanship of Mr. Nandan Nilekani, to end the identity crisis among a large chunks of population who hitherto were not able to avail the benefits of institutional support as they were lacking to fulfills the Know Your Customers(KYC) norms and other hassle full obligations. Previously the only exceptions were the Regional Rural Banks (RRB) & Co-operative Banks as they actively used to practicing the Different Rate of Interest Schemes (DRI) to weaker sections with no frills account services.
Comercial banks including Private sector banks & privately MFIs have to go a long way to come as par the endeavour made by the RRBs & Co- Operative banks through their rural focused & exactly need based services to cater the aspirations of Common Men (Aam Aadmi).

This is the prime area where the UFA movement can persuade to new age players in financial sectors for making action on many previously drifted approaches ;so, first of all it is most essential to be pragmatic on rural India’s needs and than making such effective efforts to contain the handicaps of attaining the full scale financial inclusion.Movements like UFA has greater bearing for the plights of small house holds who involves in unorganized sector and largely defunct from any institutional favour for their basic financial needs.
At this point, rural India’s today needs big push from all sides as the rural hinterland craves for basic facilities & proper opportunities that forces there dwellers towards upward migration in bigger cities; for maintaining equilibrium of prosperities (growth & effectiveness)these area must be given their due.

Financial Services has to play a major role in further development of rural India since investment in different domains going to play catalyst role in economic activities and productions. A grass root effort of spurting entrepreneurship can effectively address the rural areas .
A country like India with billion plus size of population could hardly underrate the importance of its primary sector; so, it should be the foremost aim of any noble initiatives like Universal Financial Access (UFA) to spread the word for saving the villages from despair and infuse hope in these core areas through ensuring basic facilities. Lot of wishes for UFAs like phenomenon movement … hope this movement would relentlessly strive for a vibrant ecosystem that may forward financial inclusion ahead and increase access to financial services in India in very democratic manner.

Atul Kumar Thakur
September2nd 2009, New Delhi
atul_mdb@rediffmail.com

Micro finance: A Panacea of Sustenance

Micro finance notionally stand with social aspects of economic requirements for marginal or weaker sections,both at the rural and urban spaces. It caters the micro credit for immediate requirements of initial capital for farming activities as well as for lower scale entrepreneurial activities.It introduced superb social binding over its recipients with it's theoretical aim to promote group effort during the attainment of specific enterprise.
Popularly these groups are known as Self Help Group(SHG) can be regarded as a forward move with community involvement as a key specialty potential in strengthening the social fabrics and further ushering towards the more regulated social development.

Micro finance as a concept reemerged and gained popularity in 1970’s in East Asian and South Asian countries like Philippines , Bangladesh etc: later caused for the social orientation of banking in developing nations. By which affect the formation of rural banking (Gramin Bank) in Bangladesh and India infused immense hope for inclusive development in these countries.
Dr. Muhammad Yunus received accolades and numerous international awards for his extraordinary accomplishment, so much so that many believe that Micro finance as an institution began only in the 1970’s and that too only in Bangladesh. In fact there have been also earlier claim of successes like William Reiffcisen’s village banking movement; another noteworthy was caisse populaire of Alphonse Desjardins in France were amongst the notable instances where considerable improvement was brought in the condition of the extremely disadvantaged peoples.

Such early conceptions were not entirely hypothetical, though all the previous success of Micro financial activities were not operationalised in an organized banking system,so, such initiative were largely remained confined beyond the institutional pattern.
So, seeing huge success of Gramin Bank in Bangladesh under the visionary leadership of Md Yunus and satisfactory success of Indian Gramin Banking (RRBs) in their goal; now this so far untapped sector is drawing fresh insights from commercial banking NBFC and NGOs.Over the years,Micro finance has emerged as promising way to check the poverty and empowering the underprivileged especially Women, Unemployed and Disabled.
In India a measure policy initiative was made by NABARD in 1992,for SHG-Bank linkage as a pilot project which in course of time grown into one of the largest micro finance programme in the world.

IN AN ANOTHER GREAT MOVE:-
The NABARD is planning to start a MFI to take financing to the” poorest of poor”. The venture will be launched in partnership with Commercial Banks(49%) and NABARD(51%). NABARD will also launch a Financial Advising unit to help bring down the high incidence of farmers suicides.
Despite observing high growth of rural credits and other small segments of lending in last decades the formal sector, nevertheless Microfinance accounts for less than 40% of the agriculture and rural credit; these demonic reality still haunts the welfare aim of institutional finance.Another alarming area of concern would be the burgeoning SHG and Microfinancial organizations becoming a favourite hobby horse of the NGO for exorbitant business that is going to be a grave challenge for original conception behind this movement. Most of them fail on all the basic criteria. Such tendencies needs an immediate cure through stringent regulatory mechanism…

Recently the Government is also proposing a legislation by which it will be able to regulate the Micro financial institutions to ensure fair, equitable and ethical practices and democratic functioning but that regulatory checks must be timely implemented before loosing the essence behind this social venture.Legislation also propose a ceiling of Rs50,000 by MFI; which is considerable in rural segments of Micro credit but will not be suffice in enterprise finances. NABARD would be its regulator.
In some more forward move banks must approach to a customized savings products targeting the poor. NGO should assist SHG to usher in flexible savings options too likewise banks and MFI should deliver agricultural seasonal loans with flexible repayment options through groups on a pilot basis.

Here it’s a chance to create a Micro financial promotional agency on the lines of Pali Karma Sahayak Foundation (PKSF) of Bangladesh programmes.Government must consider making NABARD MCID (Micro Credit Innovational Department) an autonomous promotional body. Having lower competitions among MFI is an another area where the India lag behinds from Bangladesh. Here some innovations are needed in Indian financial sector to infuse competition in Micro financial segments.
This is need of hour to innovate the existing products and introduce to some new product lines. Such some products which has called attention in Bangladesh can be also effective in India because of having many common grounds between two countries, some of those are: -
I. Risk Mitigation – As their insurance programmes are community managed on the basis of mutuality, they do not extend cover for risk of a co-variant nature, such as flood cover and crop failure.
II. Flexible Savings – To cope with food insecurity, employment insecurity etc.
III. Agricultural Finance- This product is already exists in India; only it needs more optimization for better needs and outcome.
IV. Larger Individual Enterprise Loans- This segment has drawn attention from policy makers like Dr Arjun Sengupta, chairmen, National Commission for Enterprise in the Unorganized Sector (NCEUS) expressed his views “If Micro finance properly nurtured and strengthened the unorganized non farm sector can be a pertinent tool of employment creation, poverty reduction and faster inclusive growth and would go a long way in closing the widening devide between urban and rural India.

NCEUS targeted fund corpus of 1,000 crores by 2011-12,target group for this corpus are small enterprise and the unorganized sector covering non farm activities employing less than 10 workers, primarily those with investment in plant and machinery not exceeding Rs5 lakh (excluding land and building at 2004-05 prices) if engaged in manufacturing and investment in plant machinery not exceeding Rs 2 lakh if engaged in non manufacturing.
However the upper limit of financing by the fund would be for enterprise with investment in plant and machinery not exceeding Rs25 lakh if engaged in manufacturing and investment in equipment not exceeding Rs 10 lakh if engaged in non manufacturing activities. As the commission cites the third census of SSI(2001-02);98% of all the manufacturing non agricultural small enterprise employed less than 10 works with an average capital investment of Rs1.47 lakh, quite a good number of them are also engaged in service business and trade.

Despite having all such arrangements, they hardly received about three percent of gross bank credit during 2002-03 to 2004-05 against the RBI priority sector plan that Micro enterprises should get 60% of total credit to SSI, they have been getting just about 40% and this had skidded to 34% in 2004-05.Even more surprising within the non farm, unorganized sector, the most vulnerable group is the smaller size micro enterprises with investment up to Rs 5lakh.
Here it will be quite imperative to channelize better policy options to minimize the suffering of this sector and enabled them for more healthy functioning. It could be a major area of employment generation, which follows by its stabilizing factor to domestic economy, So Government must also leveraged corporate to enter in Micro financial sector in more efficient and regulated manner-away from exorbitant aim of business.

Present presence of Corporate is still standing in obscure proportion, hope they will more motivated in near future with obeying the regulatory norms.In recent years Indian financial institution specially the Regional Rural Banks, some commercial Banks and to some extant Co-operative Banks displayed healthy trends in delivery of Micro credits in rural areas for farming and other employment generation programme. With merger and consolidation, RRBs being able to systematize restructuring of its business and healing from previous loss, now strengthening RRB; would indeed influence much stoutly to Micro finance programmes in near future.
Its huge branch network and strong presence in rural areas would be the most strategic factor in rural credit disbursement.Having tuned negatively for their poor financial structure and inefficient management system ; Co-operative Banks lost much of its reputation as pioneer of Micro financial movements.

Though implementation of Vaidyanathan committee is infusing some new hopes for their strategic revival. If it will able to regain its potential glory then, of course the task of mushrooming productive Micro credits would become much smooth.In present circumstances of financial meltdown, it would be desirable for Indian policy makers to stressed more on domestic financial features ; because it’s sheer domestic demand which is catalyst in sustaining the growing economy.
Hope the Micro financial programme along with other Priority sector programmes would get more attentions from policy front irrespective of any political rotations...besides RBI and NABARD have to keep vigil alive to not let deviate the social orientation of Microfinance for exorbitant greed of business by Corporates.

Atul Kumar Thakur
New Delhi
23rd March2009
atul_mdb@rediffmail.com