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Special Banks for financial inclusion: Why is it needed?
Submitted by admin on Fri, 10/21/2011 - 13:30
By P N Vasudevan, MD, Equitas
Microfinance Focus, October 21, 2011: We welcome RBI’s efforts in approaching the new banking licenses with a comprehensive long-term point of view. The recently released Draft Guidelines quoted the Finance Minister’s announcement in his budget speech for 2010-11. It seems appropriate to begin there. Shri Pranab Mukherjee had said:
“The Indian banking system has emerged unscathed from the crisis. We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services. In this context, I am happy to inform the Honourable Members that the RBI is considering giving some additional banking licences to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI’s eligibility criteria.”
It would seem the mandate given by the Minister is to meet the following objectives:
1.Ensure growth in size & sophistication of India’s banking system to enable it to support India’s future economic needs
2.Expand access of banking services (to cover those who either have no access or limited access to formal banking services)
Since the release of draft guidelines by RBI, there has been considerable media interest/discussion on which corporate institutions may get bank licenses as per these guidelines. We appreciate the complexities of these issues and we believe RBI’s draft guidelines have largely been drafted well to meet the first of the above objectives. However, it is the second objective that we would like to dwell upon.
1. Financial Inclusion & Draft Guidelines
Of the 34 or so points covered in the draft guidelines, the references to the goal of financial inclusion are limited to the following points:
Section F (Business Plan) (a) Applicants for new bank licences will be required to forward their business plan for the new banks along with their applications. The business models will have to address how the bank proposes to achieve financial inclusion.
Section G (Others) (x)
(a) The bank shall comply with the priority sector lending targets and sub-targets as applicable to other domestic banks, and
(b) The bank shall open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per 2001 census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence.
Section G (Others) (xiv)
The promoter / promoter group with an existing NBFC, if considered eligible for a bank licence, will have two options:
(a) Promote a new bank, if some or all the activities undertaken by it are not permitted to be undertaken by banks departmentally. In such cases, the activities undertaken by the NBFC which banks are allowed to undertake departmentally, will have to be transferred to the new bank, or
(b) Convert itself into a bank, if all the activities undertaken by it are allowed to be undertaken by a bank departmentally.
Under both options, the promoters will have to first set up a NOHC. Reserve Bank will consider allowing the new bank to take over and convert the existing NBFC branches into bank branches only in the Tier 3 to 6 centres. Existing branches of the NBFC in Tier 1 and 2 centres may be allowed to convert into bank branches only with the prior approval of RBI and subject to the existing rules / methodology applicable to domestic banks regarding opening of branches in these centres and also subject to maintaining 25% of the bank branches in unbanked rural centres (population up to 9,999 as per 2001 census) required of all new banks as specified in G(x) (b) above.
2. Financial Inclusion in India today – a perspective:
The Deputy Governor of RBI, in a speech on 6th September 2011 mentioned that:
1. In a recent speech by the Deputy Governor of RBI, Dr K C Chakravarti on 6th September 2011, he has mentioned the following:
a. In India, only 55% of people have bank accounts and only 9% have borrowings from the banks
b. India has the highest number of families (145 million) excluded from banking
c. There is only one bank branch per 14000 people
d. Against 6 lac villages in India, rural branches of Banks including RRBs is only 33495
e. Less than 18% of Indians have debit cards and less than 2% have credit cards
Exclusion is Staggering, Whichever Parameter One Chooses to Look at
3. Why has financial inclusion failed in India:
The Governments and Regulators have taken many steps in the past, to push financial inclusion, such as Cooperative Banks, UCBs, PACs, RRBs etc. However unfortunately, in all these cases, the ownership structure has remained principally in the Government. And that is probably the single biggest reason for the failure of these institutions in delivering efficient, low cost and highly reliable services to the low income group.
The argument that so many initiatives for creating different type of banks have failed to deliver in the past, so why allow one more model to come in? This is like saying, since Air India is doing very badly, aviation in India is unviable and no private operators should be licensed! We believe, the change in the type of ownership could mean the whole difference. While this may seem unpalatable, in the larger interest of the unbanked community of Indians, reality has to be faced.
4. Same type of banks ... Different type of results?
The current draft guidelines for licensing of new banks tread the same path in which the existing banks are travelling. Even though there is a mention of focus on financial inclusion and 25% of branches to be opened in rural areas, these norms are equally applicable to existing banks too which have failed to deliver financial inclusion over the past 40 years.
As per official figures, over 65% of the population is currently unbanked in spite of various financial inclusion mandates set for existing banks by RBI. To expect proposed new banks to reach out to this otherwise untouched segment, while operating under similar model of banking as existing banks, will be a recipe for failure! If new banks are expected to behave differently, they should be created and structured by suitably different norms as well! Doing more of the same and expecting different results is unlikely to lead to a happy ending.
With approximately 2 of 3 households outside the purview of the formal banking sector, it is vital that RBI takes significantly different measures to make a dent on these statistics.
5. Promoting financial inclusion
We believe RBI could dramatically change the landscape of financial inclusion in the country by creating special banking licenses for financial inclusion. It is critical that the right organisations are provided this license:
5.1 An obvious starting point would be to accord greater preference to those entities that have previously demonstrated a propensity to work with customers outside the purview of formal financial services. Institutions that have successfully deployed business models to provide financial services to those outside the banking realm may be more aligned to work towards the financial inclusion goal.
3.2 Besides being a challenge to make such a bank financially sustainable, the process of extending banking services for the low income segment is also an execution challenge. Hence any one who is to be considered for such a banking license should have a proven record of commitment, passion and demonstrated abilities to serve large number of low income clients.
We recommend that RBI should consider giving a special license for entities which want to exclusively focus on financial inclusion. We could call such an entity as Financial Inclusion Bank (FIB)
6. Special conditions to be attached to FIBs:
|
Objective |
Suggested Norm |
|
Financial inclusion – Savings products |
1. Balances in CASA and TD not to exceed a certain cap per customer. This cap could be set at Rs 2 Lakhs (to be automatically revised annually based on annual inflation rate).
2. Additional mandate can be that atleast 40% of these CASA accounts (both in numbers and in balances) should be from account holders who have no accounts with any other bank – thus ensuring first time users are brought into the banking umbrella. This could be implemented by creating an information bureau for savings bank accounts along the lines of credit information bureau. With all banks’ information in digitised forms, creating a Savings Information Bureau should be simple. |
|
Financial inclusion – Loan products |
1. To ensure that FIBs remains focussed exclusively on inclusiveness, there should be a cap on the loan exposure that this Bank can take on any individual or entity or entities within the same group. This cap may be set at Rs 50 Lakhs (to be automatically adjusted annually based on annual inflation rate)
2. A portion of loans should be compulsorily provided to those who have not availed of loans at other banks. 40% of all borrowers and 40% in terms of value of loans outstanding can be mandated for this purpose 3. The norms for Priority Sector Lending as applicable to other banks can be applicable to FIBs also. However, FIBs are likely to have significantly large exposures to PSL segments, probably more than 75-80%. Hence such FIBs can be given the option of assigning PSL eligible loans to other banks helping such banks fulfil their requirement and opening another source of resources for the FIBs |
|
Cap on RoE |
1. Though there is general scepticism that a bank modelled on financial inclusion would not be sustainable, yet with the right regulatory support and with committed and passionate promoters, we believe it would be financially sustainable. 2. However to ensure that under no circumstance, such FIBs resort to ‘profiteering’ and causing societal upheavals, there is a need to put a cap on the Return on Equity that such banks can generate, especially given the fact that they may very often operate in areas with inadequate competition from other banks. The average RoE of most banks in India including PSU banks is around 20-22%. Hence a cap of 25% RoE is recommended for such FIBs. If in any year, such banks generate an RoE beyond 25%, the excess of profits can be required to be deposited into some common pool of RBI which can be used for client education and protection by RBI. |
|
Minimum capitalisation of Rs. 500 Crores |
There is a general feeling that such banks should be given the benefit of a much smaller capital to start with. However we believe that for any entity to be allowed to offer banking services, it is critical that it be of a certain size so that its capital base itself supports stability and sustainability of that institution. Hence the currently recommended minimum capital of Rs. 500 Crores and to be enhanced over time to Rs. 1000 Cr should be retained |
|
Foot banking |
FIBs should be allowed to deploy field personnel to conduct doorstep service by leveraging technology like mobile banking and hand-held devices with due authentication controls. With UIDAI registrations happening, authenticating using bio metrics would drive the future of ‘foot banking’. This will improve the customer access to these banks rather than only brick and motor branches. |
|
Leveraging Technology |
Leveraging technology combined with innovative and efficient processes and controls is the only way by which costs can be managed in mass banking, in turn enabling such banks to offer basic banking services at acceptable cost. FIBs should therefore, be required to have Core Banking Solutions right from the start of their operations and should be able to offer any branch banking as well as multi channel access to its clients right from the beginning |
7.Certain flexibilities to be allowed to FIBs:
|
Sl No. |
Parameter |
Recommended norms |
|
1. |
Financial inclusion and geography – over banked areas |
1. It is very often assumed that financial inclusion is hampered only because of distance factors in rural areas. The reality is that even in cities, 2/3rd of the population do not have any banking services because it is too small a value for the banks and the cost of serving them is too high to make it worthwhile. 2. Eg. As per Census data, in Chennai, out of 16 lac families which live, 9 lac families didn’t have a bank account. And this is in Chennai, with a bank branch within a few hundred meters and ATMs within a few hundred feet from anywhere in the city ... goes to show financial exclusion is more due to unviability for existing banks to serve low income people than due to distances in remote villages 3. Thus even though cities may have surfeit of bank branches and ATMs, yet it is an under served market as far as 60% of the population of that city are concerned.
4. Hence FIBs should be allowed to open branches without restrictions. And since the type of clients they can service is well defined, wherever they open branches, even in cities, it would only promote financial inclusion 5. And if existing banks demand similar treatment, it should be immediately given to them, combined with the conditions given above! They are likely to immediately withdraw such demands for parity! |
|
2. |
Buffer period for SLR, CRR norms |
Graded scale of SLR,CRR norms to be provided for FIBs to adhere to. These may be structured so that within 5 years, the FIBs’ SLR and CRR norms are similar to bank-norms. This is specially required where existing NBFCs with certain built up size are permitted to convert to Banks. |
|
3. |
Risk weightage |
All loans provided by these FIBs, may be provided a risk weight of 50%. Some might argue that these loans provided to the financially excluded have tended to be riskier for banks. However it must be understood that banks have, thus far, not been aligned with serving these customers. NBFCs such as Shriram Transport Finance Corporation have provided large number of loans to financially excluded segments; and have still retained control on NPA levels. Thus if the FIBs build their entire business capabilities to service the low income groups, they should be able to build sufficient risk mitigants and the risk would be limited. Hence a risk weightage of 50% for its loans is recommended, which would help it reduce its cost of capital and thus pass on the benefits to its borrowers. With a cap on RoE, the benefit of improved cost of capital automatically would flow to the borrowers |
|
4. |
Promoters to bring in a minimum of 40% of the initial capital required to start the bank |
This allows the entry of only those promoters with deep pockets; and it might be reasonably expected that these promoters would prefer to operate a typical bank rather than one focused on financial inclusion. To encourage professionals and socially committed managements, it is crucial that this condition be relaxed. Professionals who have the passion, commitment and capability for creating sustainable model for financial inclusion can get other investors’ support in terms of funding its equity and hence there should not be any minimum holding defined for the ‘promoter’. Fit and Proper criteria and dispersed shareholding norms can always be used to ensure such banks are run properly and does not come under the control of single entity. |
|
5. |
Foreign shareholding to be restricted to 49% |
The current draft guidelines restricts foreign holding in new banks at 49% for 5 years. However when the bank is given a license based on the above conditions and compulsorily focuses on including the vast majority of unbanked masses and tiny, micro and small enterprises, then it is not very material what is the percentage of foreign holding. Further, the amount of risk capital available within India is significantly low and hence such banks may have to rely on foreign capital to meet capital norms. And with a cap on RoE, the usury element is anyway fully hedged. Hence the level of foreign holding including FIIs and FDIs should be kept at the same level as that for existing banks viz. 74%. |
In Conclusion
Bank nationalisation took place over 40 years back but it has not delivered banking services to more than 2/3rd of the population of the country. And today, after immense wealth created at the individual level because of the past 2 decades of focus on liberalisation, there is deep concern that the benefits of this unmatched economic growth has only reached a third of the population and leaving the rest untouched. There is an urgent felt need now for inclusive growth for which the starting point is financial inclusion.
RBI and the Government have taken many steps and initiatives to promote financial inclusion which are beginning to have an impact. And we believe that one more step of creating a differentiated set of banks focussed on financial inclusion would fulfil the dream of RBI of financial inclusion and the Government’s of inclusive growth. And in this journey, not just corporate with deep pockets but professionals with deep passion can play as good a role, if not better.
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