Reserve Bank of India feels that a set of new generation banks should be permitted to enter the banking arena so that it could fill the rural space where there are giant opportunities. A discussion paper on new banks is under preparation. However, the Central Bank has clearly stated that it wants to restrict bank licences. It does not want to unnecessarily expand the list in the Second Schedule of the RBI Act (the list of Scheduled banks). The central bank is also not interested in giving licences to large industrial houses from operating banks because of potential conflict of interest. Industrial sponsored banks could give unwarranted but preferential credit and write off loans to related companies and other favoured borrowers. India has weak corporate governance; hence restrictions should be placed so that use must not be misused.
According to RBI, there is a huge uncovered area for stretching banking. Only 30 % of the country’s area is covered by the banking sector. The rest goes without banking. If financial inclusion, the mantra of the Government of the day, should translate into reality, then the spreading of banks to rural areas is compulsory. Government’s experiments with Regional Rural banks have met with disaster. They have suffered heavy losses, because their preference was in one area while the taste of the Customer was in another. Rightly, RBI wants the new generation banks to localize their operations in rural areas, rural lending. There is plenty of rural space, where one would not be privy to competition. But the operating costs will be very high because of poor logistics. A bank’s geographical area would be large sized even though rural deposit accounts and credits are very small. Agricultural defaults in many states are high since political loan waivers have encouraged willful default. Due to extensive political patronage, Banks find it difficult to seize the land defaulters have pledged. Further, loans up to Rs 10 lakhs have been exempted from collateral security and third party guarantee.
The success of micro finance pioneer Bangladesh’s Grameen Bank, has given enough ammunition to the Indian counterparts – Microfinance institutions have come up. Micro Finance Institutions in India started off as non-profit NGOs. They depended upon public munificence for expansion. To grow faster, many of the NGOs converted themselves to for profit Non Banking Finance Companies (NBFCs). These NBFCs raised equity from various sources. For every one Rupee of their own, they could raise Rs 6/- from Banks. This enabled them to grow fast as they had toe-hold on the pulse of the rural people. SKS Microfinance, the largest player in the field has recently raised a whopping Rs 1600 Cr through Public finance. SKS is now bigger than some banks, with almost seven million borrowers worth Rs 5000 Cr in credit and around 20,000 employees. SKS and other MFIs could evolve themselves into Banking. RBI Guidelines insist that new banks must have equity capital of at least Rs 300 Cr, and no promoter group should have a stake of over 10%. These NBFC can raise more than enough equity with a wider shareholder base. NGO approach was sparse, and they could offer very little by way of Credit, while rural India wanted giant networks. Giant networks require massive capital, which can be attracted by for profit corporations. Besides scale economics will permit giant MFIs to lower the interest spread to poor clients.
Micro Finance institutions do not want to convert themselves into banking as they would come under the purview of RBI regulations. They have flourished in the consequent freedom to innovate and expand according to an eminent economist. RBI takes ages to approve branches, while MFI can freely open many at will. The staff pattern in the MFI is flexible, cheap but as banks they will face unionized wages and inflexibilities. If they turn into Banks, they have to park 25% of their money in Government securities and 6% with RBI, suffering losses. Financial discipline will go haywire if political loan waivers are put into practice. MFIs are also into consumerism, making a profit on the Credit extended to the borrowers. If MFIs have to borrow from Banks, they have to shell out 12-14% as interest, but if they become banks, they can generate deposits at 3-6%. As per the present guidelines of RBI, not only non profit NBFC can accept deposits while for profit NBFC cannot accept deposits in the wake of fly by night thriving NBFC which mushroomed in 1990 and went bust and couldn’t repay.
If rural spread is the need of the hour, and if financial inclusion need to be promoted these MFIs should be registered, and a mechanism should be evolved so that they would serve the rural areas, with their wherewithal, experience, and rural geography. RBI should come of the standard theories, should innovate and take India to a path whereby non banking areas will be served by localized institutions. However, a check mechanism needs to be put in place, so that the MFIs can play a useful role in carrying thrift and credit to the authentic India.
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