Who will bear the costs of 'universal banking'?

DEBATE

M V Nair,
CMD, Dena Bank

More than half the rural houses are not indebted and need banking services - also, technology has made servicing such accounts cost effective

The message from the government and, more particularly, from Reserve Bank of India's governor, in his recent mid-term review, on the need for introducing basic banking services to the poor is most relevant and timely.

Without the usual trappings of the exotic financial products banks normally come out with, there is scope for providing the poorer sections of the society with banking products that have basic features. Dena Bank introduced a unique product of no frills account "Dena Alpha Bachat Yojana" that provides basic banking services to the poor.

The general impression is that much of the poor households are indebted, which is not so. A fact that is not well-known is that a little more than 50 per cent of the rural households are not indebted and could be helped with efficient and cost effective financial solutions. The formal financial system will be losing in the long run, if it does not address to the financial requirements of this large section of the society.

Three issues come to the fore when banks come out with such products. First, since earlier instances of such endeavours were considered to be unproductive and unprofitable, how different it will be this time; how much will banks be hit in term of costs and profitability by such products; is this the return of government-led banking that will put the state-owned banks to disadvantage?

There is every reason to believe that things will be different this time and it is easy to explain why. The state of technology with banks today have enormous computing power that will make it relatively easier and less costly to manage the numbers. Earlier, managing numbers has largely been manual, thus, higher costs affecting profitability.

Second, India is on a sustained economic growth path, which is expected to continue for long time and banks will have a unique opportunity to assist the growth by facilitating banking spread and increasing banking access. Earlier, banks had a far more difficult task of being primary instruments of generating growth through financing asset creation. Now it will be a fair balance between providing services and assisting growth.

Third, markets in rural and semi-urban areas are becoming quite attractive for business and, thus, it will be more of a banks' initiative to penetrate these markets, invest in them and create a sizeable and significant presence for their own business interests, rather than be pursued by the government. Surely, there will be costs for which we could find efficient ways of recovering through a mix of fiscal relief and emerging growth opportunities that will continue to induce banks to expand such services.

Janmejaya Sinha,
Managing Director, The Boston Consulting Group

Forty per cent of all savings accounts have less than Rs 1,000 in them and cost banks around 15-20% of their profits - who's going to pay for this?  The Reserve Bank of India has recently issued a circular encouraging financial inclusion and directing banks to make available a basic banking no-frills account accessible to vast sections of population. I think financial inclusion is required and if you really compare the directions that have been issued, they are actually less onerous than the ones prevailing in the US. However, I don't know the best way to improve financial inclusion and the circular leads me to raise two basic sets of issues, one practical and the other philosophical, on social policy.  At a practical level today, I find that most public sector banks have a bulk of their savings accounts holding less than Rs 1,000 as minimum balances. The less-than-Rs 1,000 minimum balances are about 40 per cent of their savings accounts, providing about 1 to 2 per cent of total savings balances, losing them between 15 to 20 per cent of their total savings accounts profits. Only about 1 per cent of their savings account customers provide them 130 per cent of their savings accounts profits. The position for private sector banks is only marginally less skewed. There is, thus, already a cross subsidisation. These simple no-frills accounts cost a public sector bank about Rs 200 each a year to operate. If that much income is not generated by them in form of fees or interest on minimum balances, these accounts are loss making. Should the banks bear these losses?  The related practical question I have is: What inhibits financial inclusion today? Is it literacy, know your customer, technology, operating costs "" do we know? Is our policy addressing this? Personally, though I believe financial inclusion is important and needs to be pushed forward, I also feel that it will only take off only if banks see it as a profit-making opportunity.  The more fundamental question I have is philosophical in nature. Who is responsible for unfunded mandates? Can the costs of financial inclusion be imposed solely on banks? Whose permission should be obtained on this "" the government's, the regulator's, the shareholders', the courts', the banks customers'? Or can the people of India explicitly be asked to make a decision on something like this? This is a question that has broad relevance for the political economy today. Who should pay and how much, for the costs of public policy? Who should pay for free power? Should healthcare companies provide a certain proportion of their medicines free to the disadvantaged diseased population? What about reservation quotas on private academic institutions for the disadvantaged? Further, we need to ask what form such direction should take "" coercive, directive, or incentive-based? Or is this just a matter of corporate social responsibility? Is it sustainable? Answers, anybody?

The views expressed are personal