The Hindu Business Line : A boost to rural banking

The Economic Survey, released on the eve of the Budget, spoke of the high rate of credit growth. While the Budget does not spell out the precise steps to rein-in credit, the latent riskiness of certain sectors has been recognised by mentioning that regulations will be brought into to govern "Mortgage Guarantee" companies. Internationally, such companies offer credit enhancement opportunities to lenders and, thus, in a sense increase the reach of credit products. It remains to be seen whether the legislation recognises guarantees under Basel II norms to enable commercial banks look into such products seriously.

Boost to RRBs

Financial inclusion as a strategic initiative seems to loom over the banking sector. Thus, the Regional Rural Banks, after many attempts to push them to the fore of commercial banking and leverage their reach, have at last been pushed to the vanguard. With distribution of financial services in the rural areas being touted as the next big wave, there could be more competition for banks and NBFCs (non-banking financial companies) operating in the hinterland. The Government is now thinking of allowing the RRBs to provide consumer banking products and not necessarily keep them concentrated on priority sector lending. The Budget also states that the SARFESI Act shall cover the RRBs, thus allowing for speedy recovery of bad loans. Perhaps recognising that many NRIs hail from the hinterland, the RRBs would now be allowed to accept NRE and FCNR accounts.

In a roundabout way, the Budget recognises the often cash-strapped situation of senior citizens, and the opportunity to release the "hidden cash" from the property. These "reverse mortgages", through NHB, would provide the flexibility of occupancy for the senior citizens.

Banks currently provide overdrafts against property. While the younger population believes in looking at future cash flows to spend today, senior citizens often have their investments locked in not-so-liquid securities.

In keeping with the same theme, the Budget provides for increased medical insurance coverage through more insurance companies of the GIC group. There is perhaps an opportunity here for banks to look at bundling insurance with liability products.

Perhaps looking at the increased transaction sizes as an indirect result of increased disposable incomes, the threshold limit for banking cash transaction tax has been hiked to Rs 50,000. This would ease the administrative burden of the banks that are responsible for collecting the levy.

The Microfinance Bill (in which NABARD is proposed to be the nodal agency) is to be introduced, as indicated in the Budget. Banks have built business models around microfinance of various sizes and with various economies of scales.

Thus, regulation for this sector is important and necessary to bring in best practices and strong corporate governance principles.

(The author is a Principal Consultant, Banking and Financial Services, PricewaterhouseCoopers (P) Ltd, Mumbai.)

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