“For the last 5,000 years, poverty has been an integral part of society. Eradicating poverty is not easy. We need to start a movement and involve everyone. The priviliged, especially, need to convince themselves to bring inclusion to society. The process has begun, the technology required is available. We now need patience and perseverance.” That is Dr KC Chakrabarty, deputy governor of RBI, speaking on financial inclusion. There cannot be a better person to talk to for a special edition on the subject because sitting in his 11th floor office at RBI’s headquarters in Mumbai, he has a bird’s eyeview of financial inclusion as the man who pioneered it way back in 2005 and is now overseeing its implementation across India. Besides, as he himself says, there is hardly anybody who knows financial inclusion better than him. In an interview with R Swaminathan and BV Rao, the seasoned banker explains why they are trying to build an ecosystem where banks, society, media, mobile operators, card suppliers, UIDAI, village and district authorities come together to build the delivery model for financial inclusion in a cost-effective manner.

What was the provocation in 2005 when you started the first pilot project for financial inclusion in Mangalam village?
There was no plan or provocation. It was accidental and incidental. The RBI governor (Dr YV Reddy) was visiting Pondicherry to meet the chief minister. As Indian Bank was the SLBC (state level  bankers’ committee) convener for Pondicherry he wanted me to accompany him. On the way, we were thinking of discussion points when the governor suggested that we should propose to the chief minister that we will provide all households in the state with a bank account each. The chief minister liked the idea and assured us all support. The same evening he (chief minister) called a meeting of all bankers where the first circular on financial inclusion was drafted. The chief minister told the banks to take ownership and not to treat this as a RBI-driven project. That’s how the first stage of financial inclusion started, purely by accident, by the need for meaningful discussion points for a meeting. By providence I got the opportunity. We launched it in Mangalam village and took one year’s time to give everyone a bank account in the state. While doing so, we realised that you can camp in villages and provide bank accounts but people do not travel 20 kilometres to do a transaction of Rs 10. Then how do you cover all the six lakh villages in the country and make inclusion meaningful?

That is when we thought of the second phase of financial inclusion with the business correspondent, or an agent of the bank who would carry the bank—a small handheld device to capture transactions—to the villages. We started the first pilot project in Cuddalore district (Tamil Nadu). Following this, the RBI issued a circular that every state must introduce FI in at least one of its districts. I then moved on to Punjab National Bank. During the same period, talk began about urban financial inclusion. No one was keen to open a branch at Dharavi in Mumbai. The RBI asked me. PNB had a licence for an extension counter which we were about to surrender. Instead we decided to open a branch in Dharavi. Fortunately during the same time our five-year plans also lay emphasis on inclusive growth. So all these happened at the same time, a string of happy accidents.

When did you first realise the poor are bankable?
In 1978, when I started my banking career with the lead bank work in Gujarat. At that time I visited remote villages and tribal belts like Mandavi, Ahwa, Tilakwada, Kukurmunda, Sathwara, Salimba and others. For the first time, I realised that the poor are more bankable and commerce for the poor is more valuable than commerce for the rich because for the same quality product or service, the poor have to pay more than the rich. The rich will not let a cheap product or service reach the poor. For the same reason, the cost of a bottle of safe drinking water will be less in London city than in an African village. You can test this anywhere.

Then is financial inclusion more an issue of social inclusion?
No, it is a part of social inclusion. But, yes, finance is the key. Across civilisations it has been shown that unless you have financial inclusion, you do not have money power. You cannot even have an army if you do not have the money. So, when we have financial inclusion, we empower the poor and that facilitates inclusion in other aspects of society. For example, we have political inclusion where everyone can vote. We have reservation where they (the less previleged castes) have a say. But they remain poor because they are not included financially. Financial inclusion will not happen in isolation. But if you have financial inclusion many other inclusions will be possible. If you have money, you can have better food, shelter, housing, protection from harassment of the law enforcement machinery and access to courts. The great disadvantage of democracy is that people with money have more access to these things than people without.

On the question of access itself, we have taken steps like nationalisation of banks, the State Bank Act in 1956, RRB’s cooperative movement, self-help groups, etc. Some progress was made but we could not achieve the desired goals….
I agree, I agree...we could not achieve the end result. So why are we saying today that we will be able to achieve that? Because of technology. If you need to take products and services to the masses, what do you require? You require technology. Today that technology is available. Without technology inclusion is not possible. For example, thousands of years ago only kings and queens wore clothes as cost of producing cloth was very high. Some 150-200 years ago, due to scientific innovation, cotton ginning and processing machine led to the textile revolution which brought down cost of producing cloth by thousand times and that is why we are all wearing clothes today. Same for food and everything else. Who could read and write 1,500 years ago? Who was allowed to become literate? Only government officials and people from royal families, because cost of producing a book was very high. Then about 600-700 years ago, Gutenberg brought about a technological revolution in printing due to which the cost of books came down so much that just in the next two years every household in Germany had a Bible!

Today books are available even for 10 paise. That is why we can now say full literacy is one of the global millennium development goals. The intention was always there, but technology for it did not exist. Simlarly for financial inclusion. The intention was always there, now we have the technology to make it happen. Though it is only three or four years old, we are in an advantageous position because along with the technology we also have the kind of grassroots work that is needed to implement it. That kind of people are available in India more than anywhere else in the world. That’s why if we can get our policies and implementation right then it is possible. Earlier, this was just not possible.

Will technologies also reduce transaction cost and lead to evolution of business models?
Look, don’t go by the standard definition of technology. No scientific research and innovation is technology unless it is used by the masses. That is why steam engine is an invention while the railways is a the technology. Technology means it has to be used by the masses, that’s why transaction cost has to come down. Without that, it is not technology.

There is the BC model and then there are entire masses of people with mobile phones out of which 50% don’t have access to banking. How do we integrate the two?
Technology is a channel and it has to be a multichannel delivery model. It could be mobile phones, internet, mobile banks, smart cards, ATM cards or whatever. Banking and mobile phones are separate entities. Financial inclusion has to be a bank-level model. If you want banking you need to have bank. Now if you want to do it through mobile then you have mobile banking. Just like for telemedicine you need to have a telephone line and doctor, for mobile banking you need to have mobile company and a bank. But what many people are asking is for the mobile company to become the bank. Can a telephone company become a doctor? Then how can the mobile company become a bank? Today our regulations say that both can join hands. I have no problem with that. Yes, you can use the mobile but for that the bank and mobile company should join hands. But for the entire process the problem is the business model and the delivery model.

Financial inclusion is not just about opening bank accounts but about transactions. In that light, what is the level of satisfaction or dissatisfaction?
Unless there is transactions there is no satisfaction. Financial inclusion does not generate income on its products, i.e. bank accounts, smart cards and BCs. You have opened an account, it does not give you any money, you have only spent some money. You have issued smart cards, it does not give you any money. You have appointed BCs, it does not give you any money, you only spend more money. Even deposits don’t generate income because the bank has to pay interest on them. The entire model is viable only when you have three activities: savings, credit and remittances. We will earn by remitting the money and giving them credit. All other things except these three you will incur costs. So it will never be a business unless you start doing transactions.

We can see that there is a certain passion from the central bank to roll out inclusion. Is this passion being transferred to the banks or are they seeing it more as compliance issue? You see, we are not forcing banks but trying to persuade them and make them understand that it is a business opportunity for them. The banking industry has a vested interest in the development of society because when society develops, people’s economic condition improves and banks get more business. Banks that understand this will be able to convert. Though the general impression is that public sector banks are more into this line, but believe me, in this country, financial inclusion will be brought in by private sector banks. Banks are yet to finalise a delivery model which can be commercialised and converted into a business model. We trying various experiments, various models...I’m working with one private bank for the last two years towards a solution. We still don’t have a solution. But it will come.

A recent survey says that over 50% people take loans only for emergency purposes. So they are taking loans but not creating a productive assets. In this context, does financial literacy become part of financial inclusion?
Yes, 100% people will at some time take loans for an emergency purpose but in any society at least 50-60% people will take a loan for an employment-generating activity or for enhancing their income. For example, you want to build a house. Do you take a loan or not? It is not an income-generating activity. But you pay rent to the landlord. For 30 years you pay, your money has disappeared and you have not created an asset. When you take a loan for a house and pay it back in installments, you are creating an asset and it becomes an economic activity. Also the landlord keeps increasing rent every year, so you save that as well, that is economic activity. Daily I take three hours to go to work. So I decide to take a loan to buy a scooter. Again it is not direct economic activity but it will save me an hour every day. I can do some other work and enhance my income. Then there are farmers and SMEs. They borrow money from moneylenders at 30-50% interest. If they can borrow from banks at 15%, they will do better business.

As for financial literacy (FL), it is a larger subject. In India, 95% of the world is financially illiterate but we must teach people why they must go to banks. Literacy cannot start at the age of 25. It has to start with school curriculum like, which bank or financial product should I choose, where I can maximise and widen my return, etc. We are trying to do that.

Other issues are more complicated. Society must understand the basic point that wherever return is high, risk is much higher. If somebody is giving you a very high rate of interest for your deposits, you must understand that the risk of losing that money is high. That basic literacy society has not understood. Why go that far? Even our CVC (Central Vigilance Commission) says PSU units must give their deposits based on a quote to the bank that gives higher interest without realising that public money will be parked at higher risk.

When a borrower comes to me and says you quote the interest rate, I want the money, I know that he has already decided not to pay me back interest as well as the principal. But if someone says that 12% interest is high, you charge me 11%, I know that the person is honest and I will get my money back.

How can the role of moneylender reduce in rural areas?
There are 600,000 villages in India, out of which only 30,000 have a bank branch. What happens to the remaining 570,000 villagers? They are at the mercy of the moneylenders. So, there is no use of educating the person that going to the hospital is very good when the hospital is not there. We can keep saying financial literacy financial literacy but what’s the use when they have never seen a bank branch? So you must remember there are different kinds of financial literacy. For financial inclusion financial literacy is different from the financial literacy for consumer protection. In the latter respect, even developed societies are financially illeterate. There the concept of financial literacy caught up after the crisis of 2008.

Is it the fear of rural delinquency that is preventing banks in spreading financial inclusion as fast as possible in rural areas or is it a genuine concern?
If I see the history of human civilisational development, I have seen one thing, the poor are more creditworthy than the rich and we have no available empirical statistics to prove that the poor’s delinquency rate is higher than the rich. That is my general hypothesis. You know why the poor is more creditworthy? Because they need to take loans more than once. The poor is concerned about repayment because they have no alternative but to go for loans again and again. The rich can take money once and pocket it and may not need a loan again. They also have the clout to do business in society and become successful. If you have given a loan to a poor man who has no asset and his activity has failed, then even if you shoot him, he will not be able to return your money. To that extent your loan is higher risk. But if we can provide adequate forward and backward linkages to the poor so that by taking credit they can improve their earning we can definitely get back the money. So how do we reduce the risk, we do that through the insurance system, or banks charge a higher rate of interest.

That is why the poor pay a higher rate of interest than the rich. But until now there is no empirical evidence to show that rural loans are more delinquent than urban. Partly the delinquency is because of our inability to follow up. So while I might be chasing the people who have taken the bigger loans, I might not be following up the smaller loans. And believe me, if you do not get your electricity bill regularly, you will not pay your monthly charges also. Rural delinquency is a myth. You see, I have never known one moneylender to have become bankrupt anywhere!

What is the feedback on the BC model? How is it working?
The delivery model has not evolved. As far as the basic objectives are concerned, we are most flexible regulators in the world. If anybody says because of us (RBI) it is not working, we are willing to look into it. But the delivery model has to come from the banks. We need a cost-effective model. There are three complaints: one, there are not enough BCs, two, they are not trained and, three, that they are not well compensated.

These are part of the delivery model. If we say that we do not have enough BCs in India, in which country will you find enough of them? The only thing not in short supply in India is people. Then we say we don’t have enough trained BCs. Trained meaning what? Has he got to be trained in the IMF for doing the BCs job? Let me give you a concrete example of a technology and delivery model. You know Henry Ford. Why did his cars become successful across the globe even in those days? Because of his delivery model. Let’s say you took Ford agency in India and imported cars from its Detroit factory. Technology has done its part. The car is here, now for it to run successfully, you need decent roads. So also for financial inclusion. The technology is here, we need good digital connectivity. Without that the system won’t run. That is the responsibility of the State. So now, the car is here, the road is here. Now we need a driver.

Across the country there are 20-year-olds who with 30-days training can drive a Ford car better than the Ford engineer in Detroit. That’s why we never hear anybody say we don’t have enough drivers. That is the delivery model we need. But then we can say we don’t have enough “trained” drivers. Where do you train the drivers? In Ford’s Detroit factory? Believe me operating a mobile device is a lot easier and less risky than driving a Ford car. Our expectation is that the BCs should be trained in the mobile company. That will not happen. Now the car (technology) is there, the road (delivery model) is there and the trained driver (BC) is there, still the delivery model is not complete. You are on the road on a long drive and the car develops a snag. You call the Ford engineer in Detroit and he says ok, send the car over to Detroit! That’s not possible. The car has to be serviced here. Again there are 20-year-olds across the country who with 30-days training will repair the car better than the Ford engineer. And these boys are available every five km all over the country. That is the delivery model we need for financial inclusion also. That kind of model is yet to be developed.

You see, financial inclusion has become fashionable. When we are able to convert that fashion into passion, financial inclusion will find a cost-effective model. Fortunately, for all of us—the government, the banking secretary, RBI governor and deputy governors—it is a passion. We are trying to provide an ecosystem for financial inclusion. For that the media, society, banks, mobile companies, technology providers, village administration and villagers, everybody has to come together. When that happens the delivery model will fall in place.

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