Well done, Rajan

RBI Governor Raghuram Rajan has walked the talk. His mission during the last two years has been of curtailing inflation, manage volatility of forex, launch new outfits for greater financial inclusion. Rajan has been successful in his endeavours, by far.

The RBI, in its efforts to promote financial inclusion in its true sense of the word, has in principle granted approval to 11 companies for Payment Banks (PB) and 10 Small Finance Banks (SFB). This initiative heralds an era of revolution to bring the vast multitude of poor and the needy in the unbanked and unserved areas into the banking fold.

The twin institutions will work in tandem to meet the basic credit needs of migrant workers, low and medium income households and tiny businesses with the mission – small man first. The efforts will be backed up by cutting-edge technology.

The PBs cater to the liability side and SFBs help the asset front. The payment banks can only accept deposits through current account and savings accounts (CASA) with a cap of Rs 1 lakh per customer. The purpose is to provide migrant workers, low income earners, people in the unorganised and unbanked sector to open small savings accounts and assist in remittance services. Remittances include, using the accounts as a window, for utility payments – electricity, water, telephone, through internet banking. The PBs cannot lend loans but can issue debit cards to promote cashless transactions.

The RBI by design, has smartly chosen 11 entities for granting PB licenses. These are established telecom companies like Airtel, Vodafone, Department of Posts, Reliance Industries, Aditya Birla, Tech Mahindra etc, who have huge client base of around 100 crore plus coupled with 1.5 lakh branches of post office. These entities already have deep penetration and reach in the unbanked, less banked areas and can straight away start business – with a human face.

These techno-driven entities and post office branches will give the commercial banks a run for their money, which have only 45,000 branches in the rural areas. The existing small public sector banks will lose out on the CASA deposits in rural areas as PBs will offer better interest rates of around 6-7 per cent as against 4 per cent offered by the commercial banks. This luxury is on account of low cost of operations, clean slate with no NPA baggage.

The PBs will extensively provide “user friendly” financial apps to eventually graduate the users to mobile banking, for all their daily requirements with minimum transaction costs. Traditional banks will also start using the PBs to cross-sell their insurance products and foreign exchange which will fetch fee income to the PBs.

This differentiated banking by bringing the less privileged unorganised sector and tiny businesses into the mainstream banking with an aim to establish cashless transactions with minimal costs, maximum returns to their clients will be a game changer. The fixed deposits is insured up to Rs 1 lakh per account by the Deposit Insurance Credit Guarantee Corporation.

Master stroke
The grant of SFB licences to 10 entities is again a master stroke by Raghuram Rajan as eight out of 10 are micro finance institutions (MFIs) which are in the lending field for more than two decades. The MFIs have deep penetration into the rural pockets with sound understanding of the credit requirements of lower strata of the society and its deep insights, which is the sine qua non of financial inclusion. The small banks are designed to provide basic banking products of accepting deposits and lending loans, with certain restrictions.

The mandate for these institutions is to provide the above services to small and marginal farmers, micro and small industries and other unorganised sector beneficiaries at lesser rates on loans and attractive rates on deposits than the traditional banks. The model works on the mantra of low margins with high volumes. The ‘licensed’ MFIs will have to push themselves up to the next few levels, as they were hitherto lending small ticket loans at exorbitant rates which will now be overcome in their new avatar of the SFBs.

The small banks will have to lend 75 per cent to the priority sector – mainly agriculture and housing from the unserved and unbanked areas. Fifty per cent of the total loans should be less than Rs 25 lakh and 25 per cent of the branches should be in the unbanked rural areas. The small banks will have the financial muscle to lend higher ticket loans up to Rs 25 lakh and will now start aggressively lending to affordable housing segment which will in turn generate local employment through the multiplier effect.

These two specialised institutions when they kickstart their operations within the deadline of next 18 months after fulfilling the compliances stipulated by the RBI, will witness a paradigm shift in the banking landscape. The PBs and the SFBs will also be used by the government through the Aadhaar route for the subsidy transfers, allotment of EWS and LIG houses under “housing for all by 2022”,  thus eliminating middlemen and cash transactions.

Based on experience, the RBI may tweak the policy contours of relaxing certain norms like permitting post offices to lend loans up to a certain limit which it cannot, under the present scheme of the PB regulations and relax prudential norms of maintaining the same cash reserve ratio and statutory liquidity ratio as specified to the commercial banks.

The intent of financial inclusion articulated by Union Finance Minister Arun Jaitley in the last Budget has been wonderfully architectured by Raghuram Rajan with the creation of the payment and small banks, the success of which will be keenly watched by all. Rajan’s bet on the small banks makes us go back to the treatise of Schumacher – small is beautiful.

(The author is a Bengaluru-based banker)