At the moment, all of us are pushing hard for a less-cash society. The merchants are being goaded to entertain cards and the customers are using the Point-of-Sale or PoS machines for swiping cards. How should one encourage more and more usage of such transactions? The best way to do this is incentivizing both the banks and the merchants else it will not be a smooth ride without this.
One of the high points of our drive for “financial inclusion” is the birth of small finance banks or SFBs. In first of its kind differentiated licencing policy, the Reserve Bank has given licences to 11 payments banks and 10 SFBs. Nine SFBs have already started operations and one more is likely to join the pack in next few months. If we look at the SFB licencing norms, it is clear that the objective is to serve the people at the bottom of the pyramid. These banks are required to extend 75% of their loans that can qualify for the so-called priority loans. The maximum loan size and investment limit exposure to a single and group borrower of such bank is capped at 10% and 15% of capital, respectively, and at least 50% of their loan portfolios should constitute loans and advances of upto Rs. 25 lakh. They will definitely carry the banking services to the masses.
However, I will not be surprised if a few of the SFBs try to climb the ladder and vacate the space where they are supposed to be. If actually that happens, then the policy makers and the banking regulator would need to take a fresh look at the differentiated bank licensing model. Indeed, to become successful the SFBs need to be innovative and at the same time they should also enjoy certain flexibilities. Innovation, laced with flexibility, is the key to success in banking with the masses. Even after a decade, the banking correspondent model has not become financially successful. For any entity which works for the masses in the finance space, they must approach this as a business and not a charity. The movement will be successful only when the intermediaries make profits. And, of course, there is a distinction between making profits and profiteering. We need to maintain a fine balance.
Banking at the bottom of the pyramid has to be looked at as a business. It cannot be a compulsion dictated by either the regulator or the government. Once this is accepted, the banks will find out the right business models. One-size-fits-all kind of a solution will not help us achieve financial inclusion; flexibility is the key. The point to note is that both the government and the banking regulator acknowledge this. Had this not been the case, they would never have allowed the microfinance institutions to charge higher rate of interest for providing the credit service at the doorsteps of the customers.
The problem that most banks face is: who will serve at the bottom of the pyramid? Digital innovations are welcome but none can deny that fact that the financially-excluded people need human touch to get into the habit of financial transactions. They need handholding. Given a choice, very few bankers would love to be working in rural pockets where the quality of education and health facilities are not good and urban amenities are absent. Even if a few of them agree to serve the rural folks, their salary would not justify the business that they will do there.
Therefore, there is a need for developing a separate cadre for serving the rural folks. Local people, sharing the background of the target customers, would be most suitable to do this job. There is also an urgent need to revisit the labour laws. The banks must have the freedom to offer differentiated wages and salary to employees working in different geographies and their emoluments must be linked to their productivity. Incidentally, the public sector banks are bound by an industry wide wage agreement.
We also need to spend aggressively on the financial literacy drive. It has to be driven in a mission mode, just like the Jan Dhan Yojana and the digital India initiative. The funds spent in taking forward the financial literacy drive could come from corporate India if this comes under the umbrella of the corporate social responsibility or CSR activities.
For years, financial inclusion has been interpreted as something which starts and ends with opening a bank account. It’s time to take it forward. Going beyond mere account opening, we need to offer credit and other financial services including remittance, insurance and mutual funds, to the rural masses. We will achieve our goal if we are innovative and flexible and have freedom to look at the HR policies and labour laws in a new light. And, above all, treat this as a business opportunity instead of a compulsion of savings account. It is time of financial deepening. After all each citizen of the country have all right to be aware and have access to available financial products and services.
Chandra Shekhar Ghosh, MD and CEO, Bandhan Bank Ltd, writes this piece for FICCI’s FIBAC 2017 Knowledge Paper.