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)

BRICS 'development bank' must aim effectively to end Bretton Woods Institutions' disparities

The move to establish BRICS bank is meant to provide patient money and risk capital to long term projects and not aimed at challenging the existing multilateral financial institutions like the IMF and the World Bank, the RBI Governor Raghuram Rajan has said in a speech at an event organised in Chicago on Friday by the Chicago Council on Global Affairs.

In verbatim, his views came as: "I don't think it was primarily meant to challenge the existing multilateral institutions but it certainly is saying look we have plenty of money ourselves, why don't we put some of this money to use in a way that benefits us rather than necessarily depending on the multilateral institutions to change which is taking much more time than anybody thought of".

This is quite surprising from him, seeing he is heading India’s Central Bank and India is going to get the first Presidency of the new bank, would be headquartered at Shanghai. Rajan’s remarks certainly have potential to start a serious debate, about the future course of old mammoth discriminatory financial institutions, which have underwent almost no practical changes (mildly he admitted this time too) towards the need of the developing countries since their inception and on wake of sea of changes in the fundamental orders in the world.

As in collective reckoning, the consensus among the BRICS countries (Brazil, Russia, India, China and South Africa) to establish a New Development Bank (NDB) and a Contingent Reserve Arrangement (CRA), finally emerged out of their dissatisfaction with the ultra conservative Bretton Woods Institutions, such as the World Bank, International Monetary Fund (IMF) and the unflinching extremes of west-centric dollar dominating global monetary system.

The US has been ruling the multilateral institutions – and the BRICS that include five super-performing economies with over 20 per cent contribution in the global economic activity, posses just 11 per cent of the votes in IMF.

Adding more jerks to the adversities, the IMF's precautionary credit lines found reluctant receivers in underrepresented countries – that made central banks of these sides desperate for dollars to obtain the credit from the Federal Reserve only. The Fed played a proactive role during the height of global economic crisis in 2008, but not necessarily the similar policy will be replicated ahead too.

The BRICS countries’ inhibition in such scenario is forthcoming but rational – and their beliefs in NDB and CRA have sufficient logical traction. The NDB aims to meet with the credit requirements of heavy infrastructural projects – although the demand for credit will not be equal from these five countries, as they are into different development stages. But for meeting additional needs of infrastructure creation, the NDB has a balanced approach in terms of activating the prospective creditors and borrowers at same platform.

So, the business proposition of NDB is free from contention. However, the Bretton Woods institutions and the flocks of economists nurtured through their legacy have reservation on it, as this new development bank will promote regional co-operation unlike the already existing Inter-American Development Bank, Asian Development Bank and African Development Bank. That apprehension is totally misplaced, as the NDB with seed capital of just $100 billion or even with an incremental outlay will be not able to challenge the might of an established and mighty, IMF or World Bank – but it would be surely a beginning for BRICS to chart a new course for them in meeting with the bundled challenges of long-term finance.

Intently, the CRA intended to lessen the BRICS dependence on the Fed and dollars, showcases something different than the NDB. It is allocated $100bn – for swap lines, accessible to all five-nation members. With no permanency of lending and borrowing structure, the idea of CRA may not work as expected. But it would be naïve to reject it too early, as the potential of closer co-operation among the BRICS can unleash conducive impacts on its functioning.

Remarkably, these arrangements by the BRICS were made to counter the persisting discriminatory policies of the giant financial lenders – as in the case of IMF, it has changed everything but not its conservative structure, aligned in favour of the western countries. There is enough merit lies in the BRICS claim that the international financial system has worked against their interest. Rajan and others must heed to this truth.

Policymakers from the BRICS have been vociferously airing their views about the partial policy stances of the rich countries’ institutions, disguised as ‘multilateral agencies’. Earlier, Raghuram Rajan, was one among them, who aptly identified rich countries for pursuing selfish policies with no thought of their negative impact on emerging economies. Will he recall it now?

And the economic bubbles, their temptation of falling and making the global financial system on toe is something never amiss the scene. The Bretton Woods institutions in their present shape will be keeping such threats alive, so the notion of getting adrift from the crisis would be rather too simplistic at this point of time.

Hence, the space is for an alternative financing arrangement – first at regional, and next on the international level. This new bank is capable of bringing that, although initially with limited impact. China has been lending in Africa and that made good effects but it also violated many basic procedures – the BRICS bank has to move cautiously on this, as carrying forward the legacy of any one country out of those five would be against its collective foundational spirit. So, the mode of operation must be carried forward with a standard set of norms, never to be tempered with any one member’s discretion.

The BRICS bank has immense potential to bank with the huge number of roads, power plants and sewerage systems, as those all need large-scale funding. With the long-term capital base of the bank and meeting with the financing demands of these projects, the purpose of its establishment would be justified.

However, the new bank is not completely free from the challenges. Among the shortcomings it has, is its relatively small size, seeing it will have to work on international level. Also as Ben Steil and Dinah Walker of the US-based Council on Foreign Relations note that, China, India and Brazil have borrowed $66bn from the World Bank alone – more than the entire subscribed capital of the BRICS bank. That indebtedness may hamper these countries to go too agile in promoting policies in favour of their new bank and finally to counter the influence of the World Bank – possibly, there may be temporary ambiguity in loyalty.

Moreover, the BRICS bank will be facing adjustment related issues with the different political systems of the five member countries – as the differences between the systems in India and China are far too wide to be adjusted so easily. The new bank will have to look on the ethical concerns, include that related to the handling of natural resources by the projects, it would be financing. Its articles, which ensure that the founders will never see their voting rights drop below 55 per cent, must be scrapped or made more democratic. As this particular clauses make the idea of BRICS bank, less democratic than claimed.

Beyond even an iota of doubt, the Bretton Woods institutions are symbolising the spent time of empire, which are on verge of ruining after a painfully long saturation phase. The rest world, including former colonies have changed in the recent decades – so, the experiments like BRICS bank outlines positively where the future is – apparently, its on the side of emerging economies. Rajan should see the turning point of history little more cautiously, wishfully like he once saw the spectre of global financial crisis as early as in 2005– and delivered memorable Jackson Hole lecture.
-Atul K Thakur
Email: summertickets@gmail.com
(Published in INCLUSION)

Wrong advice that we must avoid

Banking reforms are definitely needed, but they have to be driven by recommendations that people who are thoroughly conversant with the sector, make

The idea of inclusion, otherwise a ‘progressive hypothesis', has been sadly confused with ‘technical overplay' by the Reserve Bank of India and the Union Ministry of Finance. The most sightable case is Aadhar that lays too much emphasis on technical procedures and the opening of a maximum number of bank accounts. But merely having a bank account does not make someone genuinely aligned with formal banking.

Financial inclusion is a broader aim, and its ambit is far too wide to be limited to symbolic gestures. The incentive-based system, especially in private sector, has rather ensured the low effect of recently channelised banking access. In such a backdrop, Mr Nachiket Mor-headed Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, makes the chance of financial sector reform even more distant.

The sharp corporate edge is visible in the recommendations of this committee — as it was expected of RBI Governor Raghuram Rajan. Quite naturally then, Mr Mor has seen the real solution of financial inclusion in covering each and every Indian with a bank account in next 24 months.

It is not that all initiatives taken by the RBI in the past had failed. Some did really well in increasing the delivery of institutional credit and relationship-based banking with the masses. In the first four decades after India's independence (1951-1991), the reach to institution credit went up from 7.2% to 64 per cent but to fail again at level 57 per cent with the opening of economy that year. Also money lenders have largely stayed on in the post-reform era, with some statistical differences.

They kill business with spirits of ‘wayward innovation' and walk easy step in this jubilant phase, when lobby rules the whole course. Mr Mor has missed an opportunity to re-define the utility of micro-lending. Instead, he committed blunder by underestimating the contribution of regional rural banks and cooperative societies. Probably out of focus, he couldn't check the past and present of RRBs, which are serving the rural segments, and solemnising the real intent of financial inclusion.

The RBI has played stringent with the branch affairs at banks. It is hardly a revelation, though the committee presented both malady and cure as something in fledgling state. Even before the birth of this committee, Mr D Subbarao, the former RBI Governor, had taken some crucial steps which, although not in the limelight, have done well in relaxing certain norms of banking.

In the ambit of financial inclusion, the basic rights should begin with making banking simple and accessible to all. Moreover, the services offered should be diversified and not restricted to offering a bank account, and stay satisfied. The overtures with people have to be at fast pace and fine carved out — disconnect with people or potential client makes the equilibrium of ‘good intent and business', impossible to achieve.

While opening another round of bank licensing, Mr Rajan has a fair opportunity to circulate in the vein of new entrants, sustainable determination to go ahead for achieving genuine financial inclusion. A lot would depend on how the RBI will deal with the aspiring banks and those existing ones.

A great deal has to be achieved in the months ahead, but mostly without any support from Mr Mor's recommendations. The RBI will realise this sooner than later. Next time, hopefully, it will include some bankers who have worked across this wonderland. India is a complex set of systems and our corporate lieutenants need to sharpen their knowledge and intuitions thoroughly, if they have to remain relevant in the changing environment.
-Atul K Thakur
Email: summertickets@gmail.com
(Published in The Pioneer,on January21,2014)