Banking by Inclusion: Old Wine in New Bottle

Tuesday, November 22, 2005


The government is set to carry forward some important proposals enunciated recently by the Reserve Bank of India in its credit policy statements to make Indian banking more inclusive. What the RBI has been proposing reflects a felt need of large sections of bank customers. That in turn has been attributed to a fundamental change in the way public sector banks have been operating since the 1990s.

Commercial banks, especially the government owned ones (by far the dominant players still), had at some stage made a sharp U turn in the way they perceived their roles vis-a-vis their large customer base. The question was (and is) never so stark but in the 1990s top managements probably faced a poser like the following: should we be catering to the large volume but presumably low value market or concentrate on the cream? There never was any overt ban on accepting any type of customers (except those who do not conform in a legal sense) but, given the overriding objective of profitability, PSBs followed the example of foreign and the new private banks in offering “value added’’ services and niche products. For a majority of customers affordability became an issue.

The mass banking era

A decade earlier, following the great wave of bank nationalisation (1969), the new government owned banks claimed to be performing “mass banking’’ as against “class banking,’’ then the preserve of foreign banks. Those were not mere clich?s: PSBs did aggressively expand to develop the largest branch network anywhere in the world in a short time span. A large number of five rupee accounts were opened. A minimum balance of Rs. 5 was sufficient to open a savings bank account. Their forays into lending to small scale and agriculture have been pathbreaking. All these meant taking banking products to areas and people who had been left out till then. Whatever else might be said of PSBs’ working during a quarter century of nationalisation, they were never accused of neglecting them either in practice or in spirit. There were no attitudinal problems among their employees.

Changed perceptions

The new focus on the relatively better off customers has been a direct corollary of the changed approach to commercial banking. Additionally, the new accounting norms and prudential regulations might have forced PSBs to be choosy. While nobody says that loans to small scale units or agriculture are inherently riskier than loans to a large borrower, the perception became ingrained that the latter category is “safer” and in a practical sense easier to follow up. The more recent phenomenon of PSBs disbursing loans to their large borrowers at below prime rates, effectively below cost, is only a manifestation of their discriminatory attitude. Depositors of PSBs have a special reason to feel aggrieved. By insisting on minimum balances that in many cases were much higher than what the average PSB depositor was used to was an early manifestation of the new found exclusivity. Higher charges for a variety of services such as outstation collection and issue of drafts, and substantially higher minimum balance for facilities such as ATM followed.

RBI’s call

The RBI’s recent half yearly review (October 26) has called for greater financial inclusion by banks of all segments of the population, rural or urban, revival of the co-operative credit system, revamping of regional rural banks and lending to the disadvantaged sections. A very specific suggestion is to allow opening of “no frills’’ accounts with minimum or nil balance. Banks will also have to give wide publicity to these. It must be admitted that none of these suggestions is original. The PSBs were in fact practising most of these all these years. The challenge now is to integrate these with their normal banking practices without losing sight of their commercial goals. The RBI’s advocacy of inclusive practices is belated and probably redundant. The PSBs on their own should have realised what many consumer oriented companies in India have been doing for quite some time ? that there is money to be made at the base of the pyramid and not just at the apex. If this realisation spurs them to be innovative, the government owned banks could fulfil their commercial as well as social goals.


Source: The Hindu