Enabling Inclusion - Aman Srivastava

Various studies have revealed that consumption is usually much less volatile than income, indicating a fair pattern of inter-temporal savings, even amongst the poorest households. But despite this active level of financial management, these households have no recourse to formal financial systems. Policymakers in India have recognised that improving current systems and designing new, innovative systems to reach the poor will require radical improvements in cost efficiency and an associated change in the existing set of regulations. The RBI has in recent years put in place several regulations to encourage financial inclusion by granting greater freedom to the concerned players while simultaneously seeking to protect the interests of the target populations. While many of its regulations have created an enabling environment for inclusion, some, understandably, have limited the progress that could have been made. This is an outcome of the ‘Regulator’s Dilemma’, a term coined by David Porteous: How can regulators balance their need to promote broader access to financial services with ensuring the stability of the financial system? This is a fine balancing act, failure to achieve it could lead to the choking of incipient attempts at providing universal access or financial destabilisation and the bankruptcy of the vulnerable. Ultimately, regulations have to be designed keeping in mind the risks involved. The risks will vary with the model adopted, whether the model is transformational or additive to banking. In addition, regulatory coordination will have to be achieved amongst the respective regulators to ensure they are not working at cross purposes. Since the current regulations touch upon the participatory capacities of players across all the concerned sectors, this discussion is segmented according to the regulations applicable to each sector. Which sectors are expected to play a leading role in expanding financial inclusion? Banks and mobile operators will be in the spotlight, along with any other companies that may partake in the business correspondent (BC) model. The chief regulators to walk the tightrope, then, are the RBI, TRAI and to a limited extent, the Competition Commission of India.  Several strides have been taken by the RBI in easing the regulatory environment to enable the entry and scaling up of participants. However, much more still needs to be done to ensure continued growth in this sector. For example, MSPs will have to provide inter-operable services by setting up some sort of clearing/settlement system, which will invariably involve the National Payment Corporation of India as a facilitator. Besides, banks will never have strong incentive to cater to poorer segments as long as their revenues come from floats and not from transactions.  While the RBI is currently marketing the FI paradigm through the bank-led model, it isn’t averse to giving centrestage to non-bank actors. Banks need to act quickly on the privileged position they currently enjoy.  Since financial inclusion through non-traditional modes is a new concept, and banking alliances with BCs a recent phenomenon, much is still to be learned over the coming years about customer protection issues, AML/CFT concerns, and the feasibility of various models. Regulations will have to keep evolving, and it shall be interesting to follow this evolution, which is already in motion and beginning to tangibly modify the financial landscape.

—The writer is an economist at the Centre for Financial Inclusion, Indicus Analytics. You can reach him at aman.srivastava@indicus.net

BoI to cover 400 villages under BC model

In pursuance of the RBI guidelines and instructions to all the bankers operating in the state, the Bank of India (BoI) will cover all the 400 villages in its share, each with over 2000 people, under the business correspondent (BC) model by the end of the current fiscal. The BoI has also planned to further boost up credit lending so that the state's CD ratio increases.  While this would mark the completion of the phase-I of the project, all the bankers have to bring the remaining villages, whatever the size of their population, under the BC model by 2013, said BoI executive director N Seshadri, who is in Bihar in connection with the inaugural launch of the same model at Sakra Mansurpur village in Muzaffarpur district by the RBI Deputy Governor on Monday.

Contenders unsure, new bank licence norms delayed

Draft guidelines on new banking licences have been delayed. According to sources familiar with the development, the main reason for this is that many of the comments received by the Reserve Bank of India (RBI) from various stakeholders on its discussion paper on the issue were contradictory in nature. As a result, the RBI could not come out with the draft guidelines by end-January — as it had said. According to a source in Indian Banks’ Association (IBA), the draft guidelines are expected to come out by the end of this financial year now and after that many players who are eyeing a licence might back out because the government and the RBI are expected to come up with some stiff terms on financial inclusion. “The government does not want new players to enter the banking industry and crowd the metros and big cities. Financial inclusion will get top priority in the draft guidelines,” the source said. In its second quarter review of the monetary policy on November 2, the RBI had said that the draft guidelines shall be put up in the public domain by January-end for public comments. In December, the RBI had released a gist of comments on the discussion paper on the entry of new banks in the private sector. It is now almost a year since finance minister Pranab Mukherjee said in his Union Budget speech on February 26, 2010 that in order to extend geographic coverage by banks, the RBI will consider giving some additional banking licences to private companies and non-banking finance companies. Some experts support the delay in granting of licences.  “If the RBI were to really very clearly articulate what is the responsibility rather than the opportunity, it would be more interesting. Then what will happen is that only those who have the long-term commitment to the economy will come forward. So it is better that the draft guidelines come out that way,” said Ashvin Parekh, partner and national leader, financial services, Ernst & Young. In the last one year, the list of players eyeing a banking licence has increased. It includes large corporates as well as medium and small players.

UCO Bank Adopts Village in Gujarat

UCO Bank in Gujarat state adopted Lakshmipura village with the sole purpose of uplifting the economic conditions of the village and making the inhabitants selfreliant by financing various productive activities and completion of 100% financial inclusion in the village. Bank At this occasion, sanctioned loans to the villagers for various activities and donated computers for use in local school. Seen in the picture are A.K.Bera Regional Director of RBI, Rajesh Kumar, GM, RBI, A.K. Roy, ZM, UCO Bank and others

Microfinance, macro problems

Indian activists protest in front of The Reserve Bank of India against micro finance institutions in Hyderabad.

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THE MICRO FINANCE MESS - DR. N. A. MUJUMDAR

Recent revelations of forprofit Micro Finance Institutions ( MFIs) have exposed naked exploitation by these institutions in the name of financial inclusion. Dr. . V. Reddy, former Governor, Reserve Bank of India ( RBI), recently said that these MFIs are worse than money- lenders. A money- lender lends out of his own money, whereas here, MFIs were actually borrowing money from depositors and banks and then further lending the money. In retrospect, the government of Andhra Pradesh deserves to be congratulated on its 2010 ordinance which spelt out clearly the malpractices of such MFIs. Whereas these Self Help Groups ( SHGs) are being exploited by private MFIs through usurious interest rates and coercive means of recovery resulting in their impoverishment and in some cases leading to suicides..., the ordinance said. This triggered a crisis which almost paralysed for- profit MFIs, with banks reluctant to lend, repayments dwindling and depositors tending to withdraw their money. It is this shock therapy which led to subsequent soul- searching on the part of those MFIs, the promoters of which were fattening themselves off the sweat of poor borrowers. The Microfinance Institutions Network ( MFIN), a grouping of for- profit micro lenders, has now set up a Committee to look into these deficiencies. In fact the clout of these MFIs seems to be so strong that in spite of all that has been now exposed, some influential papers plead: Dont Kill Microfinance. The short answer to such pleas is: We do not want to kill these MFIs but we certainly want to prevent them from killing their poor borrowers. No doubt the for- profit MFIs represent the predatory face of financial capitalism. But this was compounded by the institutional support which was extended to these MFIs. Such support came from the RBI, the public sector banks ( PSBs), NABARD and SIDBI. For instance, during 2008- 09, banks extended loans of something like Rs. 3,700 crore. Why should PSBs extend loans to MFIs at something like 12 per cent, when they were fully aware that these funds would be on- lent by MFIs at 25 to 30 per cent? The answer is that such loans by PSBs to MFIs were treated as riority sector lending. So this had the blessings of RBI. Similarly, some equity or quasi- equity support came from SIDBI and NABARD, of course, at concessional rates. RBI could have stipulated that PSBs should lend only to not- for- profit category of MFIs. PSBs could have also stipulated, on their part, that the on- lending rate of beneficiary MFIs should not exceed say 17 or 18 per cent. This was not done. This systemic support perhaps also lent some respectability to for- profit MFIs. Thus public sector financial resources were used to perpetuate usurious lending practices of MFIs. It is one thing to say that RBI had no stautory powers to regulate MFIs. But was it obliged to support for- profit MFIs? These questions must be answered by Dr. Reddy, during whose tenure the MFI party began. RBI could have stipulated that PSBs should lend only to not- for- profit MFIs, fixing a ceiling on their on- lending rates. This support made the system, in a manner of speaking, a co- conspirator in this business of exploiting poor rural borrowers. Public funds were allowed to generate private profits. RBI has not covered itself in glory in this episode. Because of obscenely high returns, stemming from exorbitant lending rates, for- profit MFIs have become attractive investment destinations for Private Equity and Venture Capitalists. The recent success of the IPO of SKS Microfinance is a case in point. It attracted high profile investors like billionaire George Soros, venture capitalists Vinod Khosala and Infosys Founder Narayan Murthy. Alluding to this transformation of the humble animal microfinance, Muhammad unus, the father of microfinance movement said: “ It is a complete detour and nothing but a quitting of microfinance mission.” Basically, lending to the rural poor at 30 or 40 per cent defies all economic logic. Our small rural borrowers are not Schumpeterian mini- heroes, who can make the project or activity for financing what they have borrowed, financially viable. In fact, by inflating interest cost, we are building ‘ ab initio’ non- viability into the project. Secondly, the engagement of for- profit MFIs with borrowers has been shallow based on touch and move on business models shorn of any development content. The average loans per client in both MFIs and SHGs have been low, between Rs. 3,500 and Rs. 5,000. The duration of the loan is short, typically one year or less. The small loan size and short duration do not enable most borrowers to do much except to ease liquidity problems.

(Dr. Mujumdar is editor of the Indian Journal of Agricultural Economics.He has worked for the RBI and has advised the central banks of Zambia, Mauritius, Tanzania, Belize and Cambodia.He was consultant to the World Bank, the FAO and ESCAP)