The banking sector has travelled a long way to be where it is today. In 1969, when the government nationalised banks, it had in mind a socialist approach and wanted the entire nation to benefit from the move. Financial exclusion was still a practice then. Now, the national agenda of policy makers is to include poor households into the banking fold.
Post-nationalisation brought in many sections of the society under the fold of banking, which hitherto was the privilege of the well-to-do. The opening up of the private sector in the 1990s brought about finer products and the middle-income segment benefited immensely with specialised banking services in the areas of credit card, personal, consumer home and professional loans, which govern- ment banks were then reluctant to offer. Cumbersome procedures and the sword of the central vigilance officer loomed large over the decision-making of most public sector banks. The 90’s witnessed a major swing in the conservative approaches of these government banks and today they are as aggressive as any private bank.
Having reached this level where accounting norms, after the implementation of Basel I accounting procedures and now with Basel II being implemented, the banking sector has matured significantly since nationalisation. However, one of the key roles of government banks-catering to the social objectives of the government as far as poor households and marginal farmers are concerned-remains far from satisfactory.
The government, in its recent Budget on February 29, 2008, has waived off Rs 60,000 crore of bad farm loans and banks have been directed to issue a fresh line of credit to these small farmers. Though these steps were necessary, there are still 45.9 million farmer-households in the country, comprising 51.4% of the total 89.3 million households that do not access credit either from institutional or non-institutional sources, according to National Sample Survey Organisation (NSSO) data. The government and the regulators now have the added task of getting this chunk of the ignored farming community into the financial fold. The scene is even worse in north-eastern, eastern, and central regions, where over 75% of farm households are excluded.
Commercial banks, despite their vast network of branches, find it difficult and perhaps not worthy of an attempt, especially when the officials are posted out of compulsion in lieu of their next promotion. Many mid-level government bankers have secretly admitted that they are reluctant to give away funds to those already excluded, as some time in the future there was a possibility of facing an enquiry by the management. And this could spell doom to the officer, as all his terminal benefits come to a standstill pending enquiry by vigilance officials-both internally and externally.
The Rangarajan Committee, while announcing the recommendations for financial inclusion, has indeed highlighted the extent of financial exclusion and has suggested various measures to tackle the issue. Primary among them is to improve delivery systems to enhance the level of financial inclusion and set up a technology fund with a Rs 500-crore corpus. A few recommendations in this case was improving human and physical resources, enhancing productivity, mitigating risks, and strengthening market linkages. The committee also recommended a target of opening 250 new accounts a year by every commercial bank branch, which is a step in the right direction.
In February, when C Rangarajan was in the city to discuss the highlights of his committee recommendations with the media, a question was put forth to him as to how would the regulator treat a bank in case there were defaults arising out the 250-account quota.
?Banks would be treated as per existing regulations,? he quipped.
This precisely is a worrying factor. Bankers say there are two things at the ground level that are major challenges in the goal towards achieving financial inclusion. The first one is at the ground level, where reaching out to the masses amid vast diversities, calls for specialised skill sets and they don’t come cheap. The second major hurdle is that there is no clear-cut thinking as to what banks are trying to do with the end customer by getting him included.
Going by the same yardstick as other customers, the know-your-customer (KYC) norms make it even harder a task for banks to rope in customers from outside the banking fold. This being the case, there are chances of banks going to regions where the population has some identity proof or perhaps in terrain where there are basic amenities like photo studios, fax, telephone, and photocopying machines.
The underlying thing is that the customer has a unique ID with one account but there are chances of duplication because fingerprinting, biometrics, etc still have to catch on. The Reserve Bank of India has suggested that banks ‘may’ follow weaker KYC norms, but bankers are not satisfied with this statement.
?At each stage we have a hangover of existing processes,? said a senior government banker.
The buck doesn’t stop here. All of a sudden, banks are prompted by policy makers toward a tendering process to choose a vendor, which is a three-month exercise, and then go on an enrolling spree.
The issue faced by government banks is that there is spending on procedural issues without much monitoring. The CVC is sword, bankers say. With the average size of small accounts being Rs 220, the argument put forward by bankers is whether KYC norms are required even if there is a duplication of accounts, given the meager size of each account. The counter argument to this point by regulatory officials is that even though the average size of an account is small, the fact is that ?We are speaking about volumes and this exposes the banks to a larger risk if KYC norms are not followed.?
There is, however, a major role to be played by Regional Rural banks (RRBs). The Rangarajan committee has recognised the importance of utilising the RRB network for financial inclusion. RRBs covered 525 districts of the 605 districts as of March 31, 2006. Increased coverage of districts makes them an important segment of Rural Financial Institutions for inclusion, the committee noted. While the Rangarajan committee has a detailed study on financial exclusion, what is not being envisaged is a seamless road map for commercial banks to follow. At the current juncture, commercial bankers are perplexed over achieving the objective of inclusion without breaking the ground rules laid down by the regulator.