My intent in this article is to flag off a set of relevant issues one will have to deal with while mainstreaming India’s poor in Banking.
The article has five sections: (a) Providing a backdrop, (b) Arguing that mainstreaming poor is also in the interest of “mainstream” banking, (c) Dwell upon unfolding phenomenon of “over-indebtedness” among poor, (d) Provide critique of Private Sector’s tendency to “cherry pick”, and (e) Concluding Remarks
Nationalisation of then private banks in 1969 was not merely about changing ownership from private to public, but also an attempt to provide unambiguous answers to two most fundamental questions needed to be asked again and again, viz. Banking for what? Banking for whom? If Indian Banks are not for people, then for whom? If these banks are not for 80% of Indian citizens, then which “people” we are talking about?
Post nationalisation, Indian banking industry did an impressive work in bringing hitherto unbanked sections of society into mainstream banking. This was achieved by setting up branches in unbanked areas, following directed lending in alignment with national economic development agenda, adopting a differentiated approach in charging interest on loans and launching special schemes. However, in the early nineties, there was a major “mission drift”. I do not intend to go into what exactly happened during these intervening years. However, fact remains that the spirit of 1969 was allowed to wither away in this period, so much so that till recent crores of households in “Bottom of Pyramid” did not have simple no-frills bank account.
Nonetheless, it is heartening to note that in last few years there are conscious efforts by Government of India, with the help of regulators like RBI, IRDA, PFRDA, to include millions of these households in formal banking and financial sector. There are schemes (e.g. PMJDY, MUDRA, Atal Pension Yojana etc.). Extant policies have been revised (e.g. relaxing KYC norms). New financial institutions have been licensed (e.g. Small Finance Banks, Payment Banks etc.). And financial entities were directed to launch special products aimed at poor people (e.g. Micro Insurance, Micro Pension etc.).
These developments aimed at bringing India’s poor in mainstream banking and financial sector need to be welcomed, unreservedly.
Though each of the above-mentioned initiatives is a candidate for serious discussions, I propose to confine my articulation exclusively on issues involved in providing credit to poor; to be more specific, on increasing “over-indebtedness” among poor. There are reasons to single out “credit” from other banking products. There is no other financial product other than “credit”, which is being availed by poor in volumes. “Credit” also, if not handled prudently, has an immense potential to harm poor seriously. The developments in this domain are serious and I propose to elaborate them in subsequent paras.
It is customary that the financial products being offered to poor are pre-scripted as “micro”, micro savings, microcredit, micro insurance etc. However, these “micro” financial products are not perceived merely as a scaled down versions of the similar products being offered to (say) middle-class customers because poor as a customer of financial products suffers from many vulnerabilities, which are not acquired by them but they are borne with. Let us not forget that what we are now seeking is to “include” those who have been “excluded” for centuries from social, economic and educational mainstream. It is not a coincidence that almost all the customers of these “micro” financial products belong to weaker sections, small and marginal farmers, SCs and STs, minorities and women.
In other words, mainstreaming India’s poor shall not be assessed solely based on narrow financial parameters like profitable or loss-making. No, I am not suggesting that Bankers shall step into the shoes of the welfare state. I am going to argue that “Mainstreaming poor is also in the interest of “mainstream” banking.
Mainstreaming poor is also in the interest of “mainstream” banking
It may appear that top management of a bank draws its mandate from bank’s shareholders. But that is a half-truth. The banking system, which also includes each individual bank, draws its mandate from the broader political-economic system. We know that “Fractional Reserve Mechanism” is at the heart of the banking system. The prerequisite for this mechanism to operate is social-political stability in the geographical unit in which Banks network operate. This social-political stability, in a democratic country like ours, can only be ensured with “inclusive” social, political, economic and financial systems in vogue. It will be a wise “business” proposition for bankers to be part of institutional network endeavouring creation and sustenance of such “inclusive” systems.
It was known for years that a Bank having a broad-based portfolio, both for liability as well as loan products, will be relatively more stable. This insight has also been endorsed by a recent study. The study examined a link between Financial Inclusion and Bank level stability covering an international sample of 2635 banks operating in 86 countries over a period from 2004 to 2012. The study indicates that there is a strong association between Financial Inclusion and the bank’s stability.
Now, let us dwell upon briefly on the unfolding phenomenon of “over-indebtedness” among India’s poor.
The phenomenon of “over-indebtedness” among poor
Issues involving in provisioning credit to the poor, by formal and informal credit markets are being discussed for many years and are well documented. These discussions are largely focused on “how to improve regulated, reasonably priced but inadequate credit supply” by formal sector and “how to eradicate unregulated, exploitative but on-demand credit being made available by informal sector”. “Usurious interest rates” and “inadequacy” have been identified as two main issues to be dealt with by the policymakers and regulators.
It is not that that these two issues have rendered irrelevant. But, I am of the view that this narrative is changing very fast. Indian Financial and Banking sector is increasingly being integrated into the global economy. There is a huge mass of capital sloshing around in the global economy in search of suitable investment and lending avenues. Global capital has benchmarked its expected rate of return to sub-zero rates. Fund managers are falling on each other to reach out to every potential borrower, not only from middle classes, but poor in villages as well as in urban slums. The apparently unlimited appetite of India’s poor for credit and their “willingness” to bear high-interest rates are being interpreted as most attractive lending avenues.
Some of the noteworthy features of this sector are as under:
- Financially distressed poor are not in a position to think rationally whether to avail credit being offered or not when easy credit is made available.
- There are no authentic databases of the poor borrowers which can be used to assess borrower’s repaying capacity realistically, so as to contain over-indebtedness to a certain extent.
- All this has resulted in poor borrowers borrowing from multiple sources and more seriously beyond their repaying capacities.
- Falling interest rates from formal lenders (Bandhan Bank has reportedly reduced its lending rates to around 18% p.a.)
- “Formal” is not displacing “informal” credit institutions. They coexist. Informal credit providers, charging exorbitant interest rates, continue to be “lenders of last resort” for the poor.
I concede that the phenomenon I am trying to depict is yet to become country-wide. There are regions, urban and semi-urban, particularly with relative thriving local economies, where credit is available at relative ease. Simultaneously, there are regions, with dormant local economies, where formal lenders are not interested to penetrate, leaving poor there in the arms of exploitative informal credit providers. However, if one follows the direction of this phenomenon, it is “up” and “irreversible”.
There is a macro-economic canvas against which this phenomenon of over-indebtedness is unfolding. There is a convergence of so many drivers driving micro-credit dispensation simultaneously.
Macro Economic Canvas of “Over-Indebtedness”
There is an over the presence of lenders, both from formal as well as informal sector.
In formal space, there are cooperative credit institutions, public sector banks with their respective RRBs, private sector banks, enthusiastically acquiring loan portfolios of MFIs, newly licensed Small Finance Banks and Peer-to-Peer lending platforms, Micro Finance Institutions, Gold Loan Companies, NBFCs giving consumer durable loans, Bank-SHG link programs along with state government-sponsored programs like MAVIM, SERP etc. Whereas, the informal credit sector is no more confined to yesteryear’s professional moneylenders, traders and labour contractors. In addition to these, nowadays, it is reported that anyone with reasonable cash surpluses lends money to poor people in their vicinity. They include teachers, government employees, community leaders or anyone.
Material aspirations of common people, particularly youth are on fire. In the absence of sustained and commensurate income-generating activities, they are fulfilling their aspirations by grabbing easy credit.
Lenders, flush with funds, are more than eager to lend. The last mile connectivity established by many financial entities is based on “target-driven”, incentivised brokerage model. As a result, the field staff behaves in an unfriendly manner with poor borrowers. In order to meet time-bound targets, they pump in credit into poor households, glossing over and papering out credit assessment norms. They factor in the risks involved in lending an unsecured loan in its pricing and are relying on strong-arm tactics to recover those loans if the need arises.
Manufacturers of consumer durables are increasingly piggy riding microlenders so as to penetrate remote markets.
State, keen that household consumption shall contribute in national GDP, welcomes artificial enhancement of household’s purchasing power with the help of credit.
All these developments have serious implications on the financial wellbeing of the poor borrower households.
Serious Implications of Over-Indebtedness
A significant number of poor households are reportedly in debt trap, being forced to take a fresh loan, from whoever is willing to give, to repay the outstanding one. For accumulating requisite amounts so as not to default on the due date, they go for cheap quality food items or defer medical treatment of an ailing family member, if any. This is not a case of credit discipline. Rather, it comes out of constant fear of getting debarred by all the lenders in the vicinity, if defaulted, making their lives further miserable. Easy availability of credit is also pushing these families to live beyond their means. With loan one can purchase an asset like motorbike; but such assets demands recurring expenditure on fuel and maintenance, further opening up the gap between income and expenditure of those families.
It appears that weekly or monthly instalments have or going to be a permanent feature of non-negotiable expenses in the monthly budgets of poor families.
While discussing mainstreaming of poor in banking, it would be pertinent to check the track record of Private Sector Banks in this regard.
The tendency of Private Sector to “Cherry Pick”
Private Sector, in general, seeks to maximize shareholders’ value while keeping risks minimal. Private Sector Banks are no exception. What will be interesting to know how preachers of “maximization of shareholders’ value” principle behave when they are subjected to regulatory directions hindering realization of their goal. Let us see few examples. It is observed that the Private Sector finds out ways, either to lay back or pick up “cherries” available in the given situations.
The accounts opened by Private Sector Banks under PMJDY constitute a meagre percentage in the total number of accounts opened under the scheme. Using the freedom given by RBI, Private sector banks started stipulating high minimum balance to be maintained by its customers, thereby keeping away millions of common households and cater to the select group of customers. Take an example of compliance under Priority Sector Lending (PSL) Scheme. RBI lays down overall and sectoral sub-targets to be met by each bank under PSLS, in vogue for last few decades. It is observed that though Private Sector meets overall targets under PSL, they prefer to lend to MSME sector more leaving shortfalls in meeting sub-targets for categories like direct lending to agriculture and weaker sections. We are aware how NABARD, with the help of Public Sector Banks, painstakingly build a huge network of Self Help Groups(SHGs), even in remote places in the country. There are reports that private sector Micro Finance Institutions(MFIs) piggy-ride SHG movement in many parts of the country, carved out Joint Liability Groups(JLGs) out of functional SHGs and struck roots in new locations. Similarly, it is being apprehended that newly formed Small Finance Banks(SFBs) may poach good customers, nurtured over decades by Regional Rural Banks(RRBs) leaving RRBs with a relatively weaker customer base.
Should one factor in ownership of the bank, while discussing “mainstreaming poor in Banking”? The answer is “yes”. Ownership of the bank, rather “character of capital” which owns the bank, has a decisive bearing on this subject. As elaborated earlier, private sector banks allow their “ring-fenced”, “profit-centric” approach to override every other consideration. This need not be seen as private sector bashing. What is being highlighted is a structural mismatch between the demand of the private capital and that of “mainstreaming of poor”. On the other hand, public sector banks, owned by relatively “patient” capital, with time-tested skills and orientation of its officers and employees are better suited to accomplish this mission. But this distribution of work between public and private financial entities shall not be seen as our caste-based “division of labour”. Those who undertake social purpose banking shall be adequately compensated and costs of social banking shall be at least partially recovered from those banks which do not wish to undertake social banking. Central Government, with the help of RBI, SIDBI, NABARD provides all necessary financial support to PSBs for this purpose.
India’s poor, particularly youth among them, who also happen to be electorate electing ruling parties in the general elections, must realize that their financial well-being is intrinsically linked with financial healthiness of the Public Sector Banks. Strengthening Public Sector Banks shall become one of the political demand, not alone from PSB’s employees but from the common citizens.
The objective of bringing poor into mainstream financial sector shall be an enhancement of their welfare. This does not happen automatically. There is a need for policy intervention and monitoring mechanism so that it will not result in poor’s ill-fare. Unfortunately, this is happening in quite a few situations. We have understood the seriousness of over-indebtedness and debt trapping of the poor. It may take years for them to extricate themselves from there. Another example of financial products harming poor is that of microinsurance. There are reports that lakhs of microinsurance policies have lapsed involving thousands of crores of poor peoples’ savings because the subscribers are incapable of weighing the complexities and decades-long commitments it demands. Even if respective regulator directs that these lapsed policies be remitted back to the subscribers, it will be difficult, as many of them are migrant labourers changing their locations frequently.
It is possible to prove legally, with all the paper evidence, that the concerned poor customer is solely responsible for the decision to borrow or to subscribe to the insurance policy. But it pricks our conscious. We as a society shall ask ourselves. Whether it is morally correct to apply Caveat Emptor (Buyer Beware) principle when we are dealing with the most vulnerable sections of our society?
Providing poor people access to financial products need to be seen as part of diverse poor friendly economic policies and not a panacea for poverty alleviation. These policies may include increased investments in irrigation and allied infrastructure in rural areas, actively facilitating wage and self-employment avenues for millions of youth and proactive role of the state in providing adequately for social sectors like education and health
In a functional democratic country like ours, answers to those twin questions we began with, Banks for what? and Banking for whom? are clear and loud: Banking services shall facilitate welfare of crores of the mainstream population. That requires that mainstreaming of India’s poor in Banking is not a decision to be left to Board of Directors of an individual bank but shall be a central piece of Banking Policy architecture.
The author is an Associate Professor at the Tata Institute of Social Sciences, Mumbai.
The article is based on a lecture delivered by the author at the AIBEA Conclave in Mumbai held in November 2018.