Social banking: New kid on the block?

It is certainly fortuitous that P. Chidambaram’s return as Finance Minister should be celebrated, in a manner of speaking, by the banking fraternity’s introduction of another term to dress up its confusions about business expansion. This, in a country with contesting claims on public resources.

At a recent summit on international banking in Mumbai, which drew the heads of many banks, ‘social banking’ made a grand entry as the latest hobby horse of eye-on-the-ball experts and lazy policymakers.

The times bode well for this concept’s rapid adoption. The world economy is in a mess, capital is available with an increasing few to spread around: In the European Union, it goes to bail out banks, which lend to Government at high interest rates and low promise of return.

The European Central Bank’s Long Term Re-Finance Operations have injected €1000 billion into governments on the periphery. Their bonds are due for redemption by 2014, and in all likelihood, another rollover will occur. India’s former Chief Economic Advisor Kaushik Basu has termed this repeated rescheduling a Ponzi scheme.

A safer bet

In India, bankers and policymakers are prone to grandstanding and holier-than-thou righteousness: We believe in social banking. That sounds faintly familiar as a more anodyne and acceptable substitute for “financial inclusion”. In 2006, Chidambaram pointed to a severe lapse of banking policy, providing data in his budget speech to drive home the point of just how many farmer households were left out of the formal banking system. The Finance Minister, indeed, gave bankers and dial-a-quote ‘seminarians’ something to talk and to be written about.

But ‘financial inclusion’ has a nasty ring to it; it connotes exclusion, divisiveness, a chasm separating the privileged from the not-so-privileged. In underscores the deep failures of policymaking.

‘Social banking’, on the other hand, has a more amorphous, yet embracing, ring. It does not conjure up the Dark Other; nor does it spell failure or cast any burden of guilt on the banker.

Cross-eyed banking

Just how ambiguous and appealing it could be was evident in K. C. Chakrabarty’s keynote address at the aforementioned event in Mumbai. The Reserve Bank of India (RBI) Deputy Governor opened his speech with this vision of ‘social banking’ and promptly tripped over himself several times.

“Before delving into the nuances of social banking, let me briefly dwell on what is social business, or more specifically, social banking. In my opinion, any activity which is viewed by society as not being in sync with societal priorities would get weeded out in the course of time. Therefore, any business, in order to be sustainable, needs to be socially oriented.

This is all the more true of banking business which, due to its financial intermediation function, has to necessarily be aligned to the developmental needs of the society that it operates in. Notwithstanding, banks being commercial organisations, must earn profit, else they would not remain viable or be able to absorb shocks. At the same time, they must serve a social purpose; otherwise, they will become irrelevant and unsustainable.”

The first time the Deputy Governor tied himself in a knot was in conflating social priorities with social needs. The first is an act of deliberation by someone, usually the powerful who ranks needs. People need money, but to say that some sections need it more than the others is to set the social priority for its distribution.

The second double-knot Chakrabarty tied around himself was in declaiming that any “business” that is not “social oriented” and “does not serve a social purpose” will become “irrelevant and unsustainable”, even if as he admitted that banks need to earn profits to remain viable. Money-lending at exorbitant rates was socially oriented and it remained self-sustaining and relevant only because formal banking, though “socially oriented”, became “irrelevant” to a wide swathe of the Indian poor.

After this clumsy start, Chakrabarty then cut to the chase. Social banking, he said, is “one where the rich subsidise the provision of financial services to the poor and where banking business is oriented towards serving the masses instead of exploiting them.”

The terms of discourse on banking activity are now undergoing change. It is not for banks to simply adopt financial inclusion processes and procedures. Social banking now recasts them as the principal agents of a transfer of resources (capital) from the rich to the poor; banks must be on their side.

Faint echoes of ’69?

At first glance, this sounds more radical than banks simply trying out financial inclusion practices because they have to. The sentiments are faintly reminiscent of the defence of bank nationalisation in 1969. But back then, the sweep fitted easily into a ‘democratic socialist’ rhetoric that spawned other ‘populist’ policies.

In today’s stressed out global scenario, Chakravarty’s social banking seems to make eminent sense on its own terms. Stripped of the context in which the speech was made — the rampant growth of avaricious banking world-wide, the steady drum of voices calling for more private banks and less regulation in India; the desire for advanced banking services that work on the assumption of dangerous risk taking, creating innovative products and services (think CDOs, sub-prime mortgages) that hold investors in short-term thrall — the prelapsarian fantasy world of ‘social’ banking, as Chakrabarty envisions it, could conceivably take shape.

In the meanwhile, the RBI has to deal with more pressing matters — the steady prodding from the Finance Ministry to allow more private banks and the fearful rise in banks’ non-performing assets, caused not the least by some elbowing from New Delhi to fund unviable businesses and poor farmers unable to pay back.

Who is more socially relevant: Sons of the soil or Princes in their towers?

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