Incentivising Banks To Further Inclusion - Dr K C Chakrabarty, Deputy Governor, Reserve Bank of India

One of the most talked about topics, and in fact, one which has now become the mission statement of almost all stakeholders across the economic value chain is ‘inclusive growth’. While a whole lot of effort is being put in to ensure that benefits of the Indian growth story percolate down to the lowest levels of the pyramid, a lot more is yet to be done. One of the most prominent proponents of inclusivity has been our own banking regulator, the Reserve Bank of India. It has been channeling the power that a very formidable Indian banking system possesses to ensure that an inclusive growth model evolves and helps every strata of the Indian economic system. We spoke to Dr K C Chakrabarty, Deputy Governor, Reserve Bank of India and inarguably one of the staunchest supporters of an inclusive growth for the society on what needs to be done in order to achieve what is sought on this front.

• There is a very thin line of demarcation between innovation and violation. But that is the challenge of regulation.

What according to you is the most important need of the hour in order to bring more people to the equity markets? 

We need to put in a lot of hard work. We have to ensure that more and more people are brought into the banking and financial fold first and that requires a planned approach. You cannot take the people directly to equity. This is a gradual process. In the first stage finance has to be used for creating the factors of production. In stage two, along with production, finance has also to be used for consumption purposes while in the final stage it can also be used for speculative purposes. Having said so, I would add that we need to change our attitude towards equity. People still consider investing in equity markets to be a wrong thing. It is treated like gambling. This attitude needs to be changed if we want more and more people to come to the equity markets.

Coming to inclusion and inclusive growth, the RBI will soon allow more private players in the banking space, what will this paradigm shift mean to the process of inclusion? 

One of the reasons why inclusion has not happened is because there was no competition. Once the appetite is filled, people tend not to make any extra effort. That is the normal human tendency. In the same way, banks are also making substantial profits and, therefore, they have not needed to make that extra effort to spread their reach to unbanked centres or to enlist ‘unbanked’ customers. That is why there is a need to bring in competition. We are saying that licenses should be given to those people who genuinely consider financial inclusion as a viable business proposition and are willing to spread into unbanked areas. If that does not happen, urban and metropolitan banking will become more and more unviable due to excessive competition. More competition would mean that the charges will come down and automatically, people will look for other attractive opportunities. Secondly, new players will bring in newer technology and innovation which should also accelerate the pace of inclusion.
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The conservative banking system has in a way helped in insulating us from external shocks. Will the entry of new players in any way lead to some softening of the conservatism that we have been following? 

If we say that we have kept the banking system strong by not allowing market players to take risk, then, remember that the banking system has not served the actual purpose. When you say that the banking system is stable, remember 90 per cent of the people do not have access to the system. There is no use of having a stable system in which many do not have any access at all. You can say that our supervision has been good and we have been able to maintain stability. But one of the areas where we have not fared well is that of taking banking to everyone in the country. This is self defeating. Though the banking system has done well on certain parameters, it has also failed to penetrate deep and wide. This is one area where we must give due attention and that is what we are focusing on.

What are the steps needed on the regulatory side as well as on the government front to increase the penetration?

On the regulatory front we have taken the necessary steps. We follow the carrot and stick approach. We incentivize the banks that are ready to do this job. For example, we have said that the banks have to open 25 per cent of the new branches in the unbanked rural centres. We have priority sector lending targets, and if you do not achieve these targets, there is a price you will have to pay in the form of higher allocation to less remunerative RIDF corpus. But, at the same time, we cannot force this on the banks. What we say is that, banks must look at financial inclusion as a viable business opportunity. On our part, we have freed the pricing, thereby giving the banks the flexibility and, at the same time, we have tried to create demand for banking products and services.

In the Indian context what according to you should be the right approach towards inclusion? 

First, you must embrace technology; second, you must have a proper business model and must approach the business with a profit motive. Also, you need to have a proper delivery model because handling large number of small value transactions, requires a robust, low cost technology-based delivery model. You also need to promote financial education and financial literacy among the consumers and suppliers of the products and services. Last, but not the least, you need to have a flexible regulatory framework.

Don’t you think that a flexible regulatory framework will lead to a taken for granted scenario? What is the objective of regulation? 

The objective of regulation is to facilitate good business and to obstruct bad business. When I say flexible regulation, if people are ready to take the reasonable risks then my regulation must promote this. If somebody takes unnecessary risks then my regulation must obstruct that. We want people to innovate. There is a very thin line of demarcation between innovation and violation. But, that is the challenge of regulation. That does not mean that our regulation is not effective or proactive. I can tell you very clearly, that in the area of financial inclusion, whatever flexibility is necessary, has been provided by us. If somebody says that financial inclusion is not happening due to regulation, then I am ready to debate that. If anybody can convince me about other flexibility measures that may be needed, we are ready to look into that too. You have to be futuristic in your thought process and must be proactive to the changes.
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The RBI has been actively pursuing the inclusion on its part. Has the banking sector taken an active role in enhancing this initiative too? 

The players are responding quite well. Had they not responded, nothing would have happened. You cannot have financial inclusion in isolation. What we require along with financial inclusion are economic inclusion, social inclusion as well as political inclusion. Within the existing frame-work, we have tried to convince the banks to look at the business opportunity that presents itself. If they are not able to do that, then it is their inability and not their unwillingness for doing this. I think banks alone will not be able to bring inclusion. The society, policy makers, regulators, state governments, local self governments, NGOs and the media have to support the banks in meeting this challenge.

So a major role has to be played by the government or the polity along with the regulator? That is the problem. What is government in a democracy? 

We forget that and our mindset is still old and lies in the British Raj. In democracy, people sitting in the bureaucracy, judiciary, the parliament and all of us ,are the government. But we consider the government as a totally separate entity. I feel that the politicians understand the pulse of the people. Their intention is good individually, but collectively, they might not be able to pull it off some times. The failure is partly of the society.

There are some 485000 villages with a population of less than 2000 that have been identified as the next level to provide banking services. What are challenges that you see in delivering this in a time-bound manner? 

In the last six years we have taken banking from 67000 villages to above 200000 villages. I do not think that the challenge is taking banking to villages; rather it is to take banking products there. You have to see that transactions take place in the banking accounts that are opened. Make the delivery model active and look into how quickly a problem can be resolved. This is per se a challenge. But, collectively, with the support of the society and with the policies that we are pursuing, we will be able to address those challenges.

What is your take on public-private partnership as far as this whole concept of inclusion goes? 

Without public and private cooperation, inclusion cannot happen. 

Where do you see Indian banking five years down the line? 

The future of banking cannot be segregated from the future of the economy of India. India as a whole, as a country, has enough potential. We have a young population and we have a democratic system. So, if the future of the country is bright then the banks in the country will also have a bright future.

What are your suggestions to the new entrants that are expected to get banking licenses soon? 

We have to see that they increase their customer base. For banks which are into commercial banking, the customer is the key factor. You have to give quality products and services to the customers to bring them into your fold. For the consumers, they must be alert, understand the products and services offered and should not have undue expectations from the bank. If they want good products and services, they need to pay for that. Nothing comes free.