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Q&A: Usha Thorat, Deputy Governor, RBI

'Inclusive growth means affordable finance'

Usha Thorat
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can provide an identity for the poor and those in the and at the same time help lift their standard of living, says Usha Thorat, deputy governor of the Reserve Bank of India (RBI). As she nears the end of her 38-year tenure at RBI, Thorat looks back with satisfaction at her role in India’s most fundamental economic reforms. Excerpts of an interview with Sumit Sharma:

Financial inclusion is one of the projects about which you are passionate. What can it potentially do for India’s all-round progress?
Inclusive growth is not possible without access to affordable finance, which is very limited especially for unorganised, micro and small entrepreneurs, and self-employed people. It’s an important objective to improve the standard of living. A bank account gives a person an identity and access to several other things such as becoming part of a payments system, remitting funds, getting government benefits, or having deposit-insured savings…

Are the poor missing out on India’s GDP growth?
A large number of people are being lifted from below the poverty line. They can productively utilise their capacities if they have access to finance. One is not necessarily talking about those at the absolute bottom of the pyramid. It’s a challenge to bring into the banking system those in the unorganised sector with no antecedents. One way is to encourage them to save, develop a record of savings and make themselves eligible for loans. Self-help groups will tell you that these people have proved themselves to be creditworthy.

How satisfied are you with the progress that banks have made so far in financial inclusion?
Banks have been trying to increase their coverage. But there are limitations to a bank’s physical presence. The first task for banks is to reach all villages with a population of 2,000 or more. There are about 100,000 such habitations across the country, of which about 35,000 have bank branches. The Business Correspondent (BC) model will work there since brick-and-mortar branches may not be viable in all such locations. In order to ensure that the BC model is viable, we recently permitted banks to collect reasonable service charges from customers in a transparent manner for banking services delivered through BCs, and removed the ceiling on interest rates for loans below Rs 2,00,000. There is proven technology now and banks have core banking (solution). All these factors are enabling banks to scale up significantly. We are also exploring whether retail distribution networks of companies in rural areas can be leveraged by banks as BCs, with sufficient safeguards.

Do banks that operate on the field and have a convergence of views on profitability?
Banks are working out various models for BCs. Corporation Bank is finding it profitable to use individuals. Other banks found that it wasn’t profitable with one product but it got profitable within a year with more products such as loans, insurance, government payments and remittances.

RBI plans to give new licences to banks in the private sector. What role do you see for them in financial inclusion?
Financial inclusion in underserved areas is one of the important reasons for new bank licences. We, therefore, expect applicants to look at inclusion as a business opportunity. We would leave it to the innovativeness of the aspirants. We have asked stakeholder groups to seek a dialogue with us on the discussion paper.

Where do Regional Rural Banks (RRBs) and Lead Banks figure in the agenda for inclusion?
The financial inclusion plan involves allocating about 73,000 villages to various banks for establishing their presence. are also very much a part of this. Of the 73,000 locations, about 48,000 have been identified for public sector banks and the remaining will be RRBs and private sector banks. This task of establishing a presence through branches or BCs has to be completed by March 2012. In the first round, banks just went ahead and opened no-frill accounts and weren’t able to deliver the services since the customers had to travel long distances. One has to put a more accessible banking infrastructure in place and that’s possible through the BC model.

Should break-even by banks be a priority, as RBI sees it?
Financial inclusion cannot be sustained unless it breaks-even. I don’t see any reason why it shouldn’t break-even. The kind of profit margin microfinance companies gets shows it is profitable even with lower margins. Now with banks being allowed to charge a reasonable commission and freeing of interest rates, it should not be difficult to develop a viable model. In fact, since banks’ costs and margins are much lower, the lower cost of delivery is expected to lead to more and affordable credit. I would certainly think there is a business proposition there.

Will this initiative also help transform agriculture that has been a laggard for more than a decade?
Credit has increased significantly to the sector but one doesn’t see a commensurate increase in productivity. Agriculture requires public and private investment and needs more technology, inputs, connectivity and infrastructure.

How can potential bubbles in the economy be prevented, such as those in property?
Today funds are flowing from all directions. It’s difficult for us to be able to say we’ll be able to control potential bubbles. We ensure that banks’ exposure is monitored closely and that they have risk-management policies in place to identify and limit risks and exposures, and that in the event of some stress they have the capital and the buffer to withstand that. We want to ensure that the banking system is resilient to different kinds of situations that the economy may go through.

How does it feel to be at the central bank for almost four decades?
I have spent 38 years with the central bank — 19 pre-reform and 19 post-reform. One couldn’t have imagined the changes that have taken place in the post-reform period. These have been very exciting times. I feel most privileged (to be part of this process) and excited. The future is so bright for India.

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