NBFCs, MFIs better placed for financial inclusion

NBFCs, MFIs better placed for financial inclusion

First and foremost, the country's top industrial house like Tata have withdrawn their application from the Reserve Bank of India (RBI) among the list of 26 final applicants for seeking licence for new banks.

Next, industrial groups like Mahindra showed excitement and evinced interest (publicly) to partake in new bank ventures. But after RBI announced the norms and followed up with its clarifications for new banks, Mahindra decided not to apply at all.

Shriram Transport Finance's stance is that they want to enter banking but not at all costs. Even among the remaining 25 participants, whose applications are being currently evaluated by a panel led by former RBI Governor Bimal Jalan, no one is sure about how many players will take it up eventually for implementation, once the licences issued by the central bank. 

Speculation is rife in Mint Street circles that it may be fewer and may barely touch the double-digit figure as far as implementation goes.

If that is so, then it becomes an increasingly bigger challenge for the banking sector to achieve its objective or targets in terms of financial inclusion in the country. As banks – be it private sector or PSUs –  by their very nature of existence, tend to concentrate on where easy money is available. As such, cities and industrial clusters qualify to be profitable and their style of operations does not make business in rural India in general and hitherto unbanked areas in particular profitable.

 No matter, how much ever the regulator would like banks to see financial inclusion as "an opportunity and not an obligation", still lending a few thousand rupees in rural and unbanked areas cannot become a business for banks. 

Financial inclusion, as broadly defined by the present RBI Governor Raghuram Rajan, when he was the chairman of the Committee on Financial Sector Reforms, is all about universal access to a wide range of financial services at a reasonable cost. 

In the sense, it should ensure delivery of financial services including bank accounts for savings and transactional purposes, low cost credit for productive, personal and other purposes, besides financial advisory services and insurance facilities.

Take a cursory glance through the financial sector-led prism, you will realise that even after four decades of bank nationalisation, India could not provide a simple bank account to more than half of its population which is a clear pointer that banks alone cannot serve the majority. In this context, Financial Services Secretary Rajiv Takru said, "We have committed enough atrocities on public sector banks," when asked on why policy-makers want to have more private sector banks for financial inclusion.
If one were to look at the flipside of Takru's analysis that if rules and regulations of banking do not change, the same atrocities will be imposed on private sector banks also.  All the same, a significant number of NBFCs (non-banking financial companies) are more successful than banks in fueling the rural economy with loans but they may not have categorised it as financial-inclusion-goals. That these NBFCs, despite having much higher cost of funds than banks, are still profitable suffices to say they are not stifled by rigidities of banking. 

Let's face it. These NBFCs are lot more innovative than banks to have mastered the art of enriching rural India and churning out profits as well.

In the given situation, with new banks still to come up, isn't it time to allow other players in the financial sector to take India's story on financial inclusion forward? At least, now there are others to think beyond banks for financial inclusion. For starters, successful company models are those of Mahindra & Mahindra Financial Services, Shriram Transport Finance and Intec Capital, to mention a few, besides a sizeable number of micro finance companies (MFIs). The state-run Oriental Bank of India's Executive Director V Kannan points out that for several years in the past the Regional Rural Banks (RRBs) model was doing very well as it was a low-cost model with employees being locals too. 

Subsequently, when the government insisted they (RRBs) should have the same salary structure as PSU banks, it put pressure on their costs and the model became unsustainable. "For financial inclusion to be successful, two things are required — last mile connectivity and a low-cost model."

Now, the definition of financial inclusion is also being widened with the change of guard at the central bank. 

"Financial inclusion does not just mean credit for productive purposes, it also means credit for healthcare emergencies or to pay lumpy school or college fees," Rajan said recently. 

Simply put, financial inclusion is beyond opening of accounts and depositing the subsidy money in their accounts to avoid corruption.

"It means a safe means of remunerated savings, and an easy way to make payments and remittances. It means insurance and pensions. It means financial literacy and consumer protection," added Rajan. However, the rigidity in the banking system does not permit, or make banks the best suited vehicle to deliver these.

But there are NBFCs like the shrirams and the mahindras who have succeeded in fueling the rural economy with loans but banks didn't.

How does it work for NBFCs?

For instance, out of every Rs 100 that banks lend, they do Rs 6.0 to NBFCs and they in turn just lend to businesses and consumers. If NBFCs like Mahindra and Shriram are more profitable than some of the banks, then obviously they must have done it differently which the banks have not been able to do so. 

"A vast country like India, with huge population (of 1.2 billion officially), there is a great need to utilise all possible channels to help the population hitherto untapped with financial inclusion initiatives and we believe all financial intermediaries, including NBFCs, MFIs and AFIs (agri-finance companies), etc can be utilised effectively," said Rajesh Dedhia, Head at Vantage Institute of Financial Markets here. 
 
"We do have a great reach and business model and expertise to reach out to the vast population who are otherwise unbanked till now," he said pointing out that the attitude is also a huge factor. 

Elaborating, he says most of the time, banks expect customers to walk up to them, while NBFCs are different since their staff reach out to customers. 

In fact, the new banking licence norms clearly stipulate that winners have to have a rural bent of mind. They have mandated at least a 25 per cent or one-fourth of their branches should be in villages and 40 per cent of loans have to be in priority sectors.
Most bankers informally concede how ludicrous these rules are and say that at most times they need to overcome them rather than fulfilling them. 

Eventually, PSU banks bore the brunt of the rules and also lost part of their profits due to that.

Data compiled by the apex bank reveals that share of branches of new banks in rural is 10 per cent against 32 per cent for PSU banks. Also, the ratio for PSU lenders declined because many of the rural locations (where state-run banks opened branches earlier have been redefined and now they are known as semi-urban and urban centres). Even the recently-launched Bharatiya Mahila Bank, primarily to help women, is focussing on metros and state capitals and they have nothing chalked out in terms of financial inclusion.

In the given situation experts believe NBFCs, who initially ventured out to tap rural markets – more as an exercise scouting for business opportunity – and succeeded in churning out profits there, which in turn inadvertently formed a part of financial inclusion initiatives later.

To begin with, NBFCs should be allowed to take more deposits directly and this in turn will help them to become more independent without relying on banks for higher cost of funding. 

They should also be allowed to offer savings products. For once, a large unbanked section would have got avenues to save and help to raise low-cost funds, which in turn can allow entities to lower lending rates.

Agreed, some NBFCs may have duped savers, but then some banks have also duped investors for illustration sake Global Trust Bank, which now stands merged with a PSU lender as part of the RBI's rescue act, is one such example. 

The focus should be on giving basic financial services to people in the unbanked areas at as low cost as possible. In this context, Bandhan Financial Services CMD C S Ghosh says, "We need to go beyond definition of the term and focus on providing basic financial services to unbanked population at an affordable cost." 

It may be noted that Bandhan Financial is one of India's largest microfinance company with outstanding loans of Rs 4,457 crore and 48 lakh poor-borrowers.

MFIs in the country have lent a whopping Rs 22,138 crore to 2.5 crore borrowers, mostly women and in the rural belts, according to the latest issue of MFIN Micrometer, published my Micro Finance Institutions Network, which is an association of 42 NBFCs-MFIs. Shrinjini Kumar of PwC India puts it succinctly saying, "Credit delivery alone can't ensure success....  Cost competitiveness, availability of energy, infrastructure, land and labour is as crucial. The co-existence of ease of doing business with credit delivery, through increased supply of banking and finance companies, may get us there."

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