Banks not inclusive enough

Are commercial banking (as it is currently practiced in India) and attainment of financial inclusion mutually exclusive?

It would appear so if the Reserve Bank of India’s parallel (and somewhat expeditious) movement on two separate tracks — one on the issue of new bank licences in the private sector and another on the development of a policy/institutional framework for attaining financial inclusion/financial deepening in India — is any indication.

As is well known, the RBI recently made it amply clear that it wants to announce the new private sector bank licences “within or soon after January 31, 2014”.

The RBI had also said (when announcing the new bank guidelines) that financial inclusion would be a “touchstone” based on which the selection would be made.

The applicants must have a clear road-map/strategy for financial inclusion, the RBI said.

Having said that on the new banks front, the RBI has now appointed a new committee (the Nachiket Mor committee) to specifically look at how financial inclusion and financial deepening in India can be attained. This committee has been tasked to submit its report before December 31, 2013.

And what are the key terms of reference of this committee?

To frame a clear and detailed vision for financial inclusion and financial deepening in India.

To lay down a set of design principles that will guide the development of institutional frameworks and regulation for achieving financial inclusion and financial deepening. The only inference that can be made from these two separate policy moves of the RBI is that the central bank does not think that commercial banking, as currently practiced in India (and which practice will also be adopted by the “new banks”), will help attaining financial inclusion.

Mutual exclusion inference

Why do we make that inference?

To answer that, suppose that the committee’s vision and strategy for attaining financial inclusion is not at all compatible with that of the new bank applicants? Would the RBI then completely reject those applications?

What are the chances that the vision and roadmap of the new bank applicants on financial inclusion match those of the Nachiket Mor Committee?

The chances could be quite slim — the Mor committee seems to marshal expertise in the financial inclusion area which the new bank applicants may not be able to gather at all.

Another clear pointer to the RBI’s thinking on financial inclusion is that the Nachiket Mor Committee has also been tasked with coming out with the institutional framework required for attaining financial inclusion; and also for supervisory regulation of whatever institutional framework is created.

New framework

Now, this is sophisticated jargon — what we can infer from the above is that the extant institutions, namely commercial banks, are not designed for attaining financial inclusion. If the present banks are ill-suited for financial inclusion, so will the proposed new banks.

The RBI clearly says that the institutional framework has to be re-designed. That means institutions other than the mainline commercial banks.

The bottom-line is as follows: The RBI has to issue new bank licences by January 31, 2014.

Welcome thinking

At the same time, it is also clear that the new bank applicants cannot envision what the Nachiket Mor committee will lay down as required for attaining financial inclusion and deepening.

The RBI also philosophically seems reconciled to the fact that the extant commercial banking institutional framework is not compatible with the objective of financial inclusion. Putting all these together, we can infer that banks and financial inclusion are mutually exclusive.

If that is indeed the RBI’s thinking, it would be really welcome.

For, such thinking and the consequent policy/regulatory moves the RBI may make to further such thinking could really allow the flowering of a vibrant non-bank-based financial intermediation market and structure in India.

Such a development would actually be recognition of the reality of what financial development really means in a country as vast, diverse and as largely populated as India.

It could mark a fundamental break from the highly centralised nature of the current financial system and its consequent adoption of a one-size-fits-all approach to financial intermediation.

A one-size-fits-all approach, for instance, is evident in the following regulatory stance — the RBI wants asset classification and doubtful assets provisioning norms for non-banking finance companies to be at par with those for mainline commercial banks.

Now, is such a stance valid at all, particularly when NBFCs have taken up financial intermediation in economic segments which the mainline banks have shied away, from precisely because of the inflexible regulatory norms?

If you impose the same norms on the non-bank sector, they too would shy away from providing financial services to those segments.

Is that not clear to the regulator at all? What will be the impact on “financial inclusion” if the regulator persists with that demand for uniform norms on banks and non-banks?

“Fresh” thinking on financial intermediation and regulation could also do a world of good for the RBI. It could sharpen the institutional monetary policy-making capabilities of the central bank — the tools, instruments, the strategies and tactics it adopts for implementing monetary policy.

In a diverse financial system marked by the vibrant activities of banks and non-banks, the activities of both (banks and non-banks) would (or rather should) be alike, sensitive to the monetary policy moves of the central bank.

The central bank would not be averse to independent credit creation and, more broadly, financial intermediation by non-banks.

Right now, since those monetary policy tools are blunted, the RBI takes the easy way out — almost bludgeon non-banks into non-existence.

(The author is a Chennai-based financial consultant.)

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