Financial exclusion, RBI style

T. B. KAPALI | Updated on August 23, 2013



Its regulations have driven non-banking finance companies out of existence and their customers to pawn brokers.

Do not look at what the central banker says; look at what actually he does. This is standard advice for central bank watchers. For, invariably, what the central banker does or “achieves” would be at variance with what he says in public.

This characterisation of central bank behaviour seems to fit the Reserve Bank of India quite well; not only in the execution of its “monetary policy responsibilities” but also of its regulatory/supervisory functions.

Inflation definition

Ask the average Indian household what is and has been its everyday inflation experience and what it expects on this front.

Then look at what the RBI says it has “achieved” on this front. We will know the vast gulf. (The irony here is that households’ inflation expectations are also part of the RBI’s policy documents. But, these are simply ignored as the central bank pats itself on its inflation performance with respect to a price index which, even more ironically, has no relevance for the average household at all!)

The conflict between what the RBI says and what it actually does is equally stark in its regulatory/supervisory role.

Financial inclusion is a critical objective for us, the RBI says. Indeed, it should be when Census 2011 says that 50 per cent of Indian households do not have any banking services at all.

That is nearly 50 years after the great nationalisation of 1969 and its avowed objective of taking banking to the common man.

Given the level of financial exclusion in India, therefore, we want to encourage non-bank financial intermediaries to play their due, critical role in bridging the vast gaps, the RBI says.

And, it also goes without saying that given the size and diversity of the country, we cannot have just a few non-bank financial intermediaries operating in some exclusive, select places. What we need are thousands of small financial intermediaries operating throughout the country.

Left high and dry

But what does the RBI actually do?

It has fashioned a regulatory regime in the past couple of decades which has effectively shut out small level non-bank financial intermediation — in the organised, registered or formal sector.

The table accompanying the article shows the “progress” in this regard. As the table shows, in 10 years time, we do not have any deposit-taking non-banking financial company with asset size up to Rs 25 lakh.

To be sure, the disappearance of finance companies up to Rs 25 lakh would also have to do with the fact that the purchasing power of money has declined at an annual rate of more than 10 per cent in the past decade.

The erosion in the value of money increases the value of the assets held. (This is the convergence referred to earlier). Still, we can see that there has been a fall in the number of companies across all asset size ranges up to Rs 500 crore.

Even 10 per cent or more annual inflation cannot wipe out the millions of small borrowers who could constitute the customer base of small finance companies up to Rs 500 crore asset size. What is happening to them?

They continue to exist. But, given the RBI’s heavy-handed approach to curtailing the activities of NBFCs, they are left high and dry by the “organised” financial system, as the banks anyway do not deal much with them.

Pawn brokers

It does not need much imagination to find out where the people go to satisfy their requirements for consumption finance and small business finance — straight to the local pawn broker.

It was reported that on June 24, 90 sovereigns of gold jewellery were burgled from a pawn broker in Adyar area in Chennai. The market value of that gold in stock is nearly Rs 20 lakh. How much loans would the pawn broker have made on that collateral? At least Rs 12 lakh, that is, his entire capital.

More critical here: how much of additional loans would the pawn broker be able to make if he is able to leverage his capital (of Rs 12 lakh) with borrowings?

India is likely to have lakhs of pawn-brokers. (We can also understand the key role gold plays here as business collateral).

No great secret here — only that the RBI seems to be oblivious to all this.

At the all-India level, it is estimated that the recurring credit requirements of such small/micro businesses and households aggregate as much as Rs 20,00,000 crore — 80 per cent of which is met from the non-formal sector.

But what does the RBI have in mind? Its Governor has recently been quoted: “NBFCs should continue to be regulated by RBI as credit creation by non-banks should also be regulated by the central bank for “effective monetary policy.”

One wonders what is there left to regulate deposit-taking NBFCs.

All in all, what we have is a bias against NBFCs, bordering almost on apartheid.

What else is one to conclude when the RBI puts up a Rs 25,000 crore liquidity window to support (arguably undeserving) corporate/HNI investors of debt mutual funds post July 15, 2013; but drives the small non-bank finance company out of business; and, denies an essential service to the small borrower.

From a larger perspective, these are the wages of the central bank not having a single-point economic objective; and, therefore, taking recourse to omnibus bans such as those on NBFCs; and arbitrary moves such as liquidity support to mutual funds.

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

Published on August 23, 2013

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