In their recent paper titled titled “Indian Banks: A Time to Reform?” (Source: https://bit.ly/332e0B0) Raghuram Rajan and Viral Acharya suggested six sets of what they call “reforms”. This article is a response to their recommendation in the section on “Improving the Performance of Public Sector Banks”, where they have explicitly questioned the social role of banks.
Among other proposals, they have suggested two steps — that banks should be paid for rendering financial inclusion services and that the Department of Financial Services, the overseer of banks in the Ministry of Finance, should be wound up.
Settling the old debate
The debate on whether banks should serve a social purpose or be run only purely as a business has been going on for decades. Economists in the West are unequivocal in saying that banks must be run as businesses.
Asking the principal stakeholder — the depositor — is one way of settling this debate. Banks run because of the depositors’ money, and every banker will agree with this. Figure 1 shows the numbers for the top 20 banks in the country. For every rupee of the banks’ net worth (capital plus reserves), the depositors have ₹10 with the banks. In banking, the opinion of the people whose money is most at stake should have the leading voice.
Should banks serve a social purpose?
We did a primary survey on this in the last week of October in 34 centres across the country with 1,072 deposit holders who had at least ₹5 lakh in banks. These are people with a real stake in the banks. This robust sample was interviewed online with a structured questionnaire to understand their opinion on the banking system in India.
We presented two scenarios to the deposit holders, one outlining the social purpose of banks, and the other highlighting the business and profit objectives of banks (See Figure 2). Nine out of 10 people stated that banks should serve a social purpose. The key point also to note is that depositors who are the primary stakeholders in the banks have no say in the running of the banks.
The next question raised by the Rajan-Acharya paper is the issue of paying for special services rendered by banks as part of a social agenda. The Covid pandemic gives us the perfect compare and contrast situations.
In recent months, the US Federal government had rolled out the Paycheck Protection Program, under which $600 billion was distributed to employers to pay salaries to their people. This ‘social service’ federal money was distributed through the banks who were paid $18 billion in fees for their services. In our country, when the Jan Dhan Yojana was rolled out in 2014 and banks opened zero-deposit accounts for millions of people, the banks were not paid for their services. Which is the right model for our country? We asked the deposit holders this question (see Figure 3). A good 63 per cent prefer the Indian model of not paying fees to the banks for rendering a social service, as opposed to 37 per cent choosing the US scenario.
The jury made up of the principal stakeholder — the depositors — is clear. They don’t agree with the economists. Banks must execute social service programmes and no fees need to be paid for the same.
Should DFS be wound up?
Rajan and Acharya have said that the Department of Financial Services should be wound up “as a commitment not to engage in ‘mission creep’ when compulsions arise to use banks for serving costly social or political objectives”.
As a matter of transparency, I must first record that I have worked with the DFS in a professional capacity, as a communications partner for the Jan Dhan Yojana and MUDRA Yojana. In the case of Jan Dhan, I was witness to the dedication and hard work put in by DFS officials that went behind the largest financial inclusion initiative in the world. Today, Jan Dhan is the core component of the Direct Benefits Transfer to tens of millions. As for MUDRA, see figure 4.
The figures show the effort put in by the officials of DFS to give impetus to this scheme. As of FY 2019, over ₹1.53 lakh crore of loans have been extended by public sector banks over four years, over and above the norm, which is clearly the MUDRA effect. The NPA in MUDRA loans stands at 5 per cent as of FY 2019, which is considered manageable. The DFS has been singularly responsible for bringing the benefits of financial inclusion to tens of millions of people, a matter to be commended and not criticised.
As I record the facts of performance of DFS, not for a minute am I supporting any interference in the working of the banks. As senior economists talk of the issue of “serving costly social objectives”, they should give more weightage to the costs of not having these issues addressed.
The author is Group CEO, R K SWAMY HANSA. Views expressed are personal.