Thursday, December 10, 2009

Indian Banking's Next Two Revolutions

Many Indian villages have over one thousand mobile phones. But no bank accounts.

Welcome to the great Indian revolution.

Even after the sweeping changes brought about by NREGA – the second version of which made bank accounts mandatory – real financial inclusion remains a dream.

Thanks to NREGA, many of India’s poorest of the poor now recognizes the use of a savings account. But that a bank can lend them money to meet their financial goals – even if it is microfinance - is unknown by many. A recent nationwide survey had brought out these shocking facts.

Why couldn’t the country’s public sector banks achieve within 60 years, what a handful of private mobile operators could do in 6?

The easy answer would be the scope for profits, but given the wafer-thin margins with which these large capex mobile operators function, and the efficiency with which many private micro-financiers have developed their businesses recently, bankers would need to find another excuse.

Reserve Bank of India is aware of this challenge, and is now trying to address this in two novel ways, which if fully implemented can change the very landscape of Indian banking, not to mention the achievement of amazing levels of financial inclusion.

One of the RBI strategies would seem like a throwback to the pre-nationalization era. Yes, new private banks are again welcome. But they would be back in a different avatar – Local Area Banks.

Originally conceived in the 1996 Union Budget, local area banks had got a major push with the findings and recommendations of the Raghuram Rajan Committee. RBI plans to address the safety concerns with small private banks by ensuring a higher Capital Adequacy Ratio (CAR) of above 15% - as against regular banks’ 12% - and tough regulations to prevent related party transactions.

If implemented fully, this can be a wave of opportunity for a new generation of financial entrepreneurs, cooperatives, and self-help groups. The distinct advantage RBI sees with the move - other than great accessibility – is the creation of tailor-made financial products based on local demand.

The second RBI initiative was their recent Outreach Program to commemorate their Platinum Jubilee Year. Designed around Governor Dr. D Subbarao’s Zero Finance Inclusion System, the program had inputs from all four Deputy Governors, Shyamala Gopinath, Usha Thorat, Dr. KC Chakrabarty, and Dr. Subir Gokarn.

The program has placed a new target for commercial banks that all villages with over 2000 people should get access to financial services by March 2010. Carefully selected and authorized NGOs would be allowed to assist banks in achieving this target. The critical backbone of this initiative would be cutting-edge technologies like mobile banking and biometric identification.

If RBI succeeds in these two initiatives, it would lend some credence to the tall claims of economic liberalization and the telecom / IT revolutions. Then and only then can we take the first step together, as one billion empowered people.

Because for all our optimism, there is a deep chasm between the developed and developing worlds, and that chasm is the financial security of a country’s people. And financial inclusion is the first step towards financial security.


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