Monday, September 9, 2013

Need Bank Branches that deliver Inclusive growth

Do we need more bank branches or branches that work for financial inclusion?
 Raghuram Rajan in his maiden policy brief mentioned that the banks would be free to open branches at places of their choice without seeking license within certain boundary commitments.  The predecessor policy has been that the private bank licenses would be with the condition that they open 25 percent of their branches in rural areas in the pursuit of financial inclusion. Both emphasise on the reach of the banks to enlarge.

Post liberalisation nationalised banks folded up un-remunerative branches in the rural areas first and the restructuring of RRBs, in two bouts, led to closure of branches in rural areas. In the name of viability, Primary Agricultural Cooperative Societies, the only outfits closer to the rural population, have been truncated in various States under the efficient guidance of the NABARD, a dedicated supervisory arm for RRBs and rural Cooperatives. This situation begs the question do we need more branches of commercial banks under a fully de-licensing regime or a co-ordinated lending system in rural areas for financial inclusion?

The option at the moment should weigh with the second: a co-ordinated lending system in rural areas for financial inclusion. Let me explain: PACS are age-old institutions capable of performing the dual role of extending credit and also take care of the backward and forward linkages to farming: supply of inputs and marketing of agricultural products and produce under a single roof. NABARD clearly acknowledged that the small and marginal farmers have been served better by the PACS than others. But they lack financial resources, managerial, technological and governance skills.

Commercial banks of all hues have resources but found the brick and mortar structure in rural areas not profitable. Earlier experiment of ceding some PACS to the Commercial Banks, and some of them still continue, has been partly successful. The Farmers’ Service Societies is their avatar. Those that are still functioning offer a role model for enlargement to bridge the gap of presence of bank with service in the rural areas through the rural cooperative credit system.

BCs performing as ambassadors of financial inclusion would seem to be meeting the same fate of earlier Janata or pigmy deposit schemes. There are issues of remunerative fees, prompt payment of it to the BCs and the BCs fulfilling their role to the point of expectations.

The role of BCs as mentioned in the 2012-13 first quarter monetary policy  emphasizes on quality of services, setting up ICT-based BC and proving as an intermediate brick and mortar structure  between the present base branch and BC locations so as to provide support to about 8-10 BC units at a reasonable distance of 3-4 km. The forms can vary but should have a minimum infrastructure such as a core banking solution (CBS) terminal linked to a pass book printer and a safe for cash retention for operating larger customer transactions leading in turn to efficiency in cash management, documentation, redressal of customer grievances and close supervision of BC operations.

The business correspondent model allows banks to do cash in-cash-out transactions at a location much closer to the rural population, thus addressing the last mile problem. As on March 31, 2013 banks have reported deploying 195,380 business correspondents that covered 221,341 villages, according to the latest available RBI data.

In 2010, RBI allowed PACS to function as BCs but the takers are few. Recently, taking a cue from the Report of the RBI Expert Committee on restructuring of STCCS, NABARD advised the DCCBs/StCBs to separate the core and non-core functions of PACS and let only those PACS that take on the role of BCs to perform the core functions, for it defines the core function as lending for farming and rural activities. There would seem to be little realization that the core function would be ineffective without the accompanying non-core functions and it is members’ mandate for functioning that is crucial in the democratically run cooperatives.

While the States that continue to be the regulators of the PACS and the PACS themselves have expressed dissent openly over such intrusive instructions, the fact remains that the latter including the DCCBs lack financial muscle comparable to the commercial banks for taking up technology infusion and credit risk assessment abilities. Therefore, a hybrid model of allowing PACS to function but with effective and efficient linkages to both the licensed cooperative and commercial bank branch system would provide the best reach to the rural areas and deliver the financial inclusion initiative, with the required legal facilitation from the State Cooperative Laws. The existing under-performing BCs can be subsumed with such a system. Institutional inclusiveness is the need of the hour.