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Creating competition the only solution for financial inclusion………M Rajshekhar
Three decades after Independence, most poor Indians still lack institutionalised access to insurance, savings, remittances and loans. The outcomes are predictable. Migrant labour, carrying hard cash when they head back home, run the risk of being robbed. The poor rely excessively on loans to cope with a crisis — accidents, unpredictable weather, sick cattle — though insurance would be more appropriate.
KC Chakrabarty, Deputy Governor of Reserve Bank of India, is concerned over the state of affairs, and rightly so. He talks about regulation of the microfinance sector, under the scanner for its lending practices and corporate misgovernance and on universalising financial services in the next 10 years.
The Andhra Pradesh government recently put microfinance institutions (MFI) on notice, saying it would ask the RBI to derecognise some of them operating in the state. The state is home to many well-known MFIs. However, ad-hoc demands like these, or suggestions that the RBI clamp down on these institutions by extending its priority sector lending benefits only to non-profit MFIs, or by imposing interest rate caps have not found favour with him.
Some MFIs have done a good job, he says, let them continue. And “do not say MFIs should not lend to the poor. The women will have to borrow from moneylenders that will be much worse.”
The larger question here is about financial inclusion, he says. We have to tackle this issue systemically. Many of these ills have prevailed because people lack alternatives. The only long-term solution is to create competition for the MFIs. If greater competition is the key, why aren’t places with multiple MFIs seeing better customer service? Competition between multiple MFIs is fine, he says, but the cost remains the same.
According to him, competition has to be from someone who can provide a product or service of equal quality at a cheaper rate. And that can be done only by the mainstream financial institutions. “Our approach is that those who borrow today from MFIs must borrow from banks. And those who borrow from moneylenders must borrow from MFIs, and the reliance on moneylenders should go. That is when we say that financial inclusion is complete,” he says.
“MFIs giving loans is not financial inclusion.” Nor is it enough to open a no-frills account. At the very least, four banking products need to be provided: a savings-cum-overdraft account, a pure savings product (ideally, a recurring or variable recurring deposit), a remittance product and entrepreneurial credit like Kisan credit card.
How is the RBI planning to nudge banks into offering these services? By increasing competition in urban areas so that banks are forced to look at rural areas more closely. “My basic philosophy is that commerce with the poor is more viable, more profitable, provided you have the ability to do business with them. That is what we are asking the banks in the financial inclusion plans: develop the ability to do business with the poor. Not as a social obligation, but as pure banking.”
The central bank has removed the impediments that bar banks from entering rural areas. “We have made pricing free, we have done away with
restrictions governing the opening of bank branches.” Over time, he says, wherever the banks go, they will find competition is already present, and the next bank will go another 5 km down the road. That is how financial inclusion will spread. Cooperatives should also do the same thing and have to be an integral part of the financial inclusion drive. “Cooperatives know the people better. But, at this time, their abilities are minimal. They have to bring in technology and professional people. And, the central bank has to license them so that it can monitor them. This emphasis on financial inclusion has come about only over the last oneand-a-half years or so. It will take 3-4 years to be able to say there is an improvement. To reach everyone in each and every village may take 10 years.
And then, we will get to a point where we have an MFI, a government bank, a private bank and maybe a cooperative in the same village? “See, private bank, government bank, cooperative bank, I do not differentiate. They are all banks. Just ownership is different. Banks, MFIs, moneylenders. These are the three of them.” That said, MFIs and NBFCs will continue to be relevant. Those who are not creditworthy, whose know-your-customer details cannot be established or are too risky for mainstream financial institution, will continue to borrow money from them.
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