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)

Fault lines of microfinance

The brief euphoria generated by the private MFIs withered away with the collapse of their doubtfully structured model. Its representative face in India, Vikram Akula’s high rise and bottom low with SKS microfinance initially leveraged the market’s attention towards this nascent industry and later made it synonymous with degenerated “business class”. Business wise, private MFIs like mutual funds have always underperformed its peer in financial sector and both were hyped up and then saturated, leading to the slide towards underperformance under the unquiet regulatory treatments.

The idea of microfinance was presented as altruistic, which was the fatal error. Had it started with the aim of optimising operational costs and its final lending rates to the end users, surely it would have never got the tag of “non performing heaven”! Broadly, the managements of MFIs have missed the business mission as direct lender to the petty customers and instead they got accustomed to play as unethical lending brokers to the severely needy customers. Hence, they have been and still playing a mean role between blood sucking moneylenders and organised financial institutions and surprisingly feeling not bad doing this.

They charge almost 20% more than banks and less than moneylenders. Question arises in present scenario; do MFIs need a major revamping or simply shut down? So far, their managements have failed to realise the essential evils, foremost among them is to acting in capacity of brokers on the money of banks instead sustaining in lending market with alternative cheap funds. As private equity players are never going to spend their shrewd pennies in Indian MFIs without inserting unviable conditions and MFIs can also no longer survive on the bank’s money, so chances are very thin that they would remain relevant to low scale financing. After Kingfisher Airways, it would hardly be a surprise if SBI will lose its many thousands crores of rupees as NPA on the MFIs ventures.

The bright performance of microfinance has only witnessed in inglorious Regional Rural Banks (RRBs), which truly acted as the financer of poor rural folks on very just lending rates set by the RBI. Despite that, they always remained ignored and never got the attention it deserved. With cooperative banks reduced to a tool of political patronage and commercial/private banks lukewarm in lending microfinance portfolios, RRBs are the institutions that stand out as a beacon of hope. For revamping microfinance in rural and semi-urban areas, integration of RRBs into a single fold would be a revolutionary step besides giving it the all service/operational benefits as like of Scheduled Commercial Banks.

RBI and finance ministry have to act fast to make Priority Sector Lendings completely stringent, and under this regulatory changes banks would be liable to lend atleast 1/3 of their genuine funds under the welfare measures. Prospects of microfinance would be boosted with it. Second regulatory change immediately required is to capping the MFIs lending rates on par with the banks and if they found business tepid there should be no looking back. In present scenario, RBI can’t and shouldn’t afford the luxury of artificially keeping the solvency of beleaguered MFIs alive, the best it can do to give them fair chance to run in the Indian market.

The efficient and organised microfinance could be channelised well through the existing public/private sector banks under the consistent regulatory monitoring of RBI. Private MFIs have to learn raising the seed capital for running a profit making business, and not only under the hippocratic guise of false idealism. Once they will learn to compete with banks, their business model would become credible. Unbanked sections are big opportunity and that must not be taken as granted…end of policy hassles would make microfinance a truly vibrant area under the institutional finances. India may be the nation of poors but it’s not poor itself, so chances are not yet dim for a better time ahead!

Atul Kumar Thakur
February 28, 2012, Tuesday, New Delhi
Email: summertickets@gmail.com

Expanding Roles of Regional Rural Banks

Regional Rural Banks{RRBs} were first set up in the year 1975, under the RRB Ordinance Act {1975}; the ordinance was later replaced by the RRB Act {1976}. Formation of these banks was the result of the growing realization that the ethos and attitude of the existing Public Sector banks were not entirely conducive to meet the credit needs of the rural peoples.
RRBs or Gramin Banks existential quest originated through the broad financial vision of then the Prime Minister Mrs. Indira Gandhi, who could foresee these banks strong role in future consolidation of Indian banking businesses, particularly in rural hinterlands. –remarkably this was the culmination earlier revolutionary move of large scale nationalization of banking industry i8n 1969.

To cope with the contemporary existing challenges, nationalization of fourteen banks along with the creation of a strong pool of regionally focused RRBs were the well timed initiative of the government which constructively moulded the further Indian growth stories for next two decades before foraying into liberalization of the Indian economy in 1991. Indeed government ownership led banks to expand their network dramatically, which in turn helped them in procuring low-cost deposits, boosting profits besides fueling country’ rate of savings and growth.
RRBs infact played very vital role in meeting with the goal of “social control” of Indian banks to reach with idealistic dream to the social hierarchy-RRBs have very high stake in forwarding Indian GDP growth rate to the 5.5-6% in the eighties and further improvement of banking performances in the nineties and thereafter besides broadening the saving rate from 12%in 1969 to 20% in 1980-branches from 8,000 in 1969 to 32,000 in 1980 and further to 60,000 in 1990.

Partial success of rural banking model could be best attributed to the no-frills operational methodology with low-cost and very less cumbersome services delivery in unbanked rural areas which was out rightly an unprecedented phenomenon before these two very important changes in Indian banking landscape.
Although post economic reform era witnessed a drastic shift in earlier compulsions of PSU banks to widen their rural footprints; in recent years these banks have shown stark differences from their rural responsibility albeit RRBs have alone displayed the proper resolution in this regard.With RBI’s new flexible branch opening rulings, their ongoing amalgamation and restructuring in their businesses-today RRBs are swiftly emerging as a lead player in rural banking business.

As on March 31,2009, RRBs had total business of Rs1,80,000 crore, of this deposits were of Rs 1,20,000 crore and total lending was at Rs 20,000 crore-besides statistics, the significant contribution of RRBs in rural financing is suffice to place it in high end Indian banking.
In recent annual international ranking by the UK based Brand PLC-this year SBI breaks into top 50 with a brand value of $4,5551 million; Indian banks have explicitly improved their brand value during the recent recession phase as big daddies of global banking were struggling to germ their previous standings, there are twenty Indian banks have placed in the recent Brand Finance@Global Banking-very soon as a single entity, Indian Regional Rural Banks would be next among them with unique rural dimensions.

But steps taken by the government and RBI in the last few years were not reached to the level of satisfaction; as per RBI records-of the six lakh habitations in the country , only about 30,000 have access to commercial banks-just 40% of the population have bank accounts and this ratio is hugely variable in different geographical region. RRBs with more than 15,000 branches have massive reach in the country’s deep rural areas, its mandate is to provide a business roadmap for these banks to strengthen them and extend banking facilities to the unbanked areas.

The RBI’s recent recommendation of 9% CRAR{Capital to Risk Weighted Asset Ratio}for RRBs to make sure of their capitalization is good omen since most of them are way behind this , a lot of RRBs are not well capitalized and their CRAR varies between 5-7%. It’s a welcome move from government to constitute a committee under the RBI Deputy Governor K.C.Chakravarty to capitalize the RRBs in the country; accompanying this with Raghuram Rajan Committee on Financial Sector Reform recommendations-such as minimizing the undue emphasis on credit delivery and shift of focus to improving access to financial services would surely back RRBs to focus on the crest of Indian banking.
Atul Kumar Thakur
February 21st 2010, New Delhi
atul_mdb@rediffmail.com