Prime Minister Narendra Modi recently announced a new scheme to promote financial inclusion while the Reserve Bank of India has allowed non-banking finance firms to act as banking correspondents and is working to permit payment banks and small banks to drive financial inclusion. Will these efforts suceed? Two opposing views:
THESE GOALS CAN BECOME A REALITY
S. Viswanatha Prasad, founder and Managing Director, Caspian Impact Investment Adviser
As a stakeholder in the impact investment space over the past 15 years, I see promise and am optimistic. For the entire plan to work, three important pieces need to fall in place. First, we need clients who want to use these services; second, we need a low cost, viable distribution network; and third, we need banks and financial institutions to serve these clients. I see several of these pieces being systematically addressed by the government and the RBI. Let's start with the clients.
While opening bank accounts may not be sufficient on a standalone basis, if we combine this with a debit card and an overdraft facility of Rs 5,000, we can reasonably expect the poor to use them. Also, if benefits and subsidies are transferred to this account, this will make it more transactional.
Evidence from an MFI already suggests this. Janalakshmi, India's third-largest MFI, has begun disbursing its loans using a prepaid bank card in a pilot programme. Interestingly, while many borrowers still withdraw their amount at one go, many draw the money when they need it. They also have an option to save through a recurring deposit. The frequency of transactions is increasing and this is important for the viability of managing this account. The big difference in the new plan is to include the urban poor. Now let us look at the network of agents.
Reports suggest that the government is focusing on the viability and income of the tens of thousands of these agents who form the last mile connect to these poor clients, a critical aspect which was earlier ignored. Unless these agents are remunerated suitably, this network will become defunct. Also, allowing MFIs who are well capitalised and professionally run, to act as these agents is an important and positive new development.
The banks and financial institutions form the third and most important piece. If clients are serviced by a viable network of agents, we need institutions that are willing to offer products and services for these agents to distribute. That is why the new generation of institutions -small banks, MFIs (as banking correspondents) and payment banks - are an important piece of this puzzle. In this respect, a big positive signal has already been sent by the RBI by giving a bank licence to Bandhan, the country's largest MFI. Challenges aside, these ambitious goals can become a reality.
An example of this is the emphasis placed in recent years on the business correspondent model. It provides micro-clients with a local intermediary who represents a large commercial bank without necessitating a visit to the bank's premises by "unwelcome" low income people.
The model was initially hobbled by both pricing caps and limitations of the service provision to not-forprofit agencies. Recently, a more liberal dispensation has gradually emerged with first, the removal of the pricing cap, then the widening of the service provision to all manner of economic agents (including kirana stores) and, in recent weeks, to the opening up of the business correspondent role to for-profit nonbank finance companies - read commercial MFIs.
However, this too is hobbled by the concerns of commercial banks about the cost of the service relative to the size of transactions; a binding constraint that has meant that a sustainable business model has yet to emerge for the service. Financial inclusion via business correspondents has been like a stuttering car with a choked carburettor. The Prime Minister's latest announcement of a Financial Inclusion Mission is hinged upon the opening of bank accounts, issuing of linked debit cards to otherwise excluded persons and of the provision of life insurance of Rs 1 lakh to the account holders. For several years now the RBI has encouraged the opening of basic savings bank accounts with commercial banks both directly and through business correspondents.
By end-March 2013, there were 182 million such accounts with an average savings balance of just Rs 1,005. Field research and feedback from local institutions indicate that at least 85 per cent of these accounts were dormant, having been treated as pass through accounts by recipients of direct benefits under MGNREGA or pensions or other handouts. The number of ICT transactions undertaken by business correspondents is no more encouraging - just 234 million in 2012/13, an average of 1.3 transactions per account in a whole year. Adding physical transactions at the bank branch will not take this average much beyond two transactions a year.
The prognosis for the Mission providing an immediate fillip to financial inclusion is not good. More encouragingly, the RBI has also recently published its draft guidelines for small finance banks and payment banks. The central bank proposes a much lower capital requirement of Rs 100 crore for small banks who will be allowed to operate in "a few districts" and offer deposit as well as credit services.
MFIs amongst other non-bank finance companies are welcome to apply. Payment banks must simply satisfy prudential norms and place their deposit funds in safe government securities.
Much remains to be worked out for these two new types of institution. Conversion of MFIs to small finance banks in particular will open up a range of deposit and credit services to low income households through institutions they are already familiar with and, mostly, comfortable dealing with provided the Yes, Minister syndrome does not get in the way. Operation by small banks in "a few districts" sounds too few for a Rs 100 crore net worth financial institution to be viable? However promising is the outlook, the institutional mechanism needs to be fully understood and addressed. Yes, Governor?