Piggybacking on Aadhaar, banks can reach financial inclusion target by May

Written by Arun S | Arup Roychoudhury | Updated: Feb 24 2014, 19:42pm hrs
Nachiket MorNachiket Mor (AP)
The RBI panel report on financial inclusion has attracted criticism from bankers and financial sector experts for its unrealistic financial inclusion and priority sector lending (PSL) targets. Many have also questioned the viability of payment banks, a system designed to help banks achieve financial inclusion targets. In an interview to FEs Arun S and Arup Roychoudhury, the RBI Central Board member and chair of the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, Nachiket Mor defended the panels recommendations and said the targets are indeed achievable. Edited excerpts:

Are you confident that banks, which are now finding it tough to meet the PSL target of 40% of adjusted net bank credit (ANBC), can achieve the 'adjusted PSL target of 50%' that the report suggests

The (PSL) target is still 40% of ANBC. The adjusted number is along with weightages. If a bank achieves 40% today on the basis of its current disbursement, it will achieve 50% adjusted PSL target. If we had kept it at 40% and added weights, it would have amounted to a sharp reduction in PSL requirement.

People are commenting on the issue somewhat casually. They need to look at the actual computation method mentioned in the report. At the end of the day, these percentages are a matter of debate. The core issue is does one think specialization is a good idea or not In the report, sectors and districts are given weightages on the basis of the difficulties in lending to them. The more difficult ones get a higher weightage and the less difficult ones get a lower weightage. A bank will have to achieve an adjusted PSL value of 50% by following the weightages.

Those lending to a difficult sector in a difficult-to-reach district can benefit from a multiplier value based on the specific district and sector. That's the core idea. The RBI has to decide exactly what that weight should be. We have given some regional weights. Some banks say I dont disburse in those areas. The reality is that we have done this calculation and it is in the report. If you disburse your loans today at 40%, you will get to 50 points. There is no increase in the target.

The report has set a target of January 1, 2016 for each Indian resident, aged above 18, to have an individual, full-service and safe electronic bank account. Do you seriously think this is achievable If so, what is the rate at which banks have to open accounts to ensure that they reach this target

If you follow the traditional methods of doing this, 2016 is too ambitious a target. In fact, you may need another 20 years. The idea hidden in the report is that you have to use other strategies to get to the target. In State Bank of India alone, in the last two or three years, they have opened 200 million accounts. I learnt about this recently from SBI chairperson Arundhati Bhattacharya. A single bank is opening such a large number of accounts using agents, and not using their branches.

The point we (the panel) are making is that you have to use new approaches to get to those targets. These include agents, PPIs (prepaid instrument issuer) or payment banks and post offices. These are people who are able to move at a different pace and have a different economic structure. If you piggyback on the Aadhaar process, opening a bank account can be done much faster. There are already one billion mobile connections. Tomorrow you (Aadhaar-holder) can get an SMS and you can have a billion bank accounts.

The point being made is, if you follow traditional approaches of opening up branches and identifying customers, even four years is not enough. It is okay to say shift the target from 2016 to 2018. But there is no logic to that number then. We put our recommendations on the basis of our thinking that the Aadhaar process will complete the enrollment, because if you are piggybacking on Aadhaar, then the process will get done by 2016 or even earlier. Aadhaar will cross 70 crore card-holders by May this year. That itself gives you nearly 100% coverage in terms of bank accounts.

There is criticism that the payment banks model is not viable given the proposed norms, including prohibition on them extending credit, even as they will be required to comply with all other RBI guidelines relevant for banks including the Cash Reserve Ratio. They have to also deposit the balance proceeds in approved Statutory Liquidity Ratio securities with a duration of no more than three months and wont be permitted to assume any credit risks. They will also be restricted to holding a maximum balance of Rs 50,000 per customer. Do you think investors are convinced about the viability of payment banks given the stringent norms

In fact, payment banking is the only profitable part of banking. If you take it away, then banking is not a profitable business. So how can you simultaneously say that it is the most profitable part of banking but it is not viable If you look at today's PPIs, including Airtel Money, they seem to be doing okay, even though they are not growing. Worldwide there are many institutions that are just doing payments, and that too very competitively. You have to think about what process you have to choose. But if you are going to set up branches and then follow the traditional model, you may not achieve the (financial inclusion) target. In that case, don't set up a payment bank. You have to use alternate mechanisms to get there. SBI uses the agents' route, instead of branches.

Will the final norms be diluted, considering the criticism

The committee has made recommendations, but I don't know if the RBI will accept those.

When will the guidelines be out

I cant say. It could be tomorrow, or it could be 20 years from now. Sooner they come out with the guidelines, the better. Fundamentally, we have not suggested any new ideas in the report. All ideas, including PPIs, business correspondents and cooperative banks, are already on the ground. We have simply asked how we can clean them up, strengthen them and make them more effective.