On a chilly January afternoon in his spanking new central office in Gurgaon, SL Bansal, chairman of Oriental Bank of Commerce, shares his ideas on financial inclusion in the times of massive social and economic changes and the challenges these changes pose for India, its banks and its economy. Edited excerpts from an interview with            
Governance Now:
The general impression these days is that in a country of 1.2 billion, with only 40% coverage of banking, the future of banking is very rosy. How close to reality is this pretty picture?
You have to look at this in its entirety. We can divide the 1.2 billion into three segments. Number one, as you rightly pointed out, those who are not dealing with the banks as on date are financially excluded, whether they form 40% or 60% of the population. The remaining population is of two segments —high networth individuals (HNIs) and small and medium groups. This latter group is growing fast. Every year close to three crore people are being added to the banking system. And these people have habits different from the conventional construct of the Indian banker as a frugal spender and careful saver. These people are in a sense very close to the western cultures, they don’t live by their pay package and obligations, they live by their EMIs. Their principal concern is the EMI: “Can I take this loan? Can I support the EMI?” They don’t look at the cost of the assent, cost of acquisition of that asset or their savings. As a result, our savings ratio is coming down gradually. It may be good, it may be bad, but the point is it is happening. So, if the consumption pattern is undergoing a change and people are believing more and more in spending, then for a developing country such as India with such a big population, it’s a huge challenge. It’s a challenge because you cannot get the kind of resources into the banking industry that you need for meeting the growing credit needs of such an economy.

See, our credit-GDP ratio is just about 55 or 56 percent. In developing economies it is over 100%. Now, in an 1.8-trillion dollar economy which needs the  credit-GDP ratio to double to 100% in say another six or seven years, you need enormous additional resources. But the growth of our deposits is not matching that kind of growth. Even in today’s environment where the credit demand (loan seekers) is muted* and credit growth (loans given) is less than 16%, deposits are growing only at 13-14% building a huge pressure on resources. Now, if we are to compete in the world market, our lending rate has to come down. But since the lending rate is a function of the deposit rate (inversely proportional) and it cannot come down unless the deposit rate goes up. Now because of this change in habits of these young boys and girls, who are guided only by their EMIs, I think it’s a going to be huge challenge.
Now let’s get back to the 60% population which is today financially excluded. Even if we bring them into the banking fold by opening no-frills accounts, nothing is going to change dramatically in the next five years as far as our resources are concerned because you cannot expect huge deposits to flow into the banking sector from these accounts for two reasons: One, their per capita income is bare minimum and, hence, two, they will be hardly in any position to save. But, yes, one thing will happen: the credit requirement of the economy will go up (more bank accounts means the likelihood of more demand for credit). So you are looking at the credit-GDP ratio climbing to 100% very fast.  

That once again means we have to make ways to match that requirement. Now, what options do we have? Either the government should manage its finances well so that whatever the SLR (statutory liquidity ratio) is stipulated that can be freed so that it will provide the cushion for CRR (cash reserve ration) or some other instrument has to come so that the bank can get the necessary funds.

In financial inclusion, the primary purpose is to bring the unbanked into the banking fold so that all subsidies and whatever the government is transferring, can be transferred into their accounts. Three things will happen. Efficiency will improve because money will go directly to the beneficiary of the subsidy. Corruption will be addressed in the sense that middlemen will go. Cost of services will also come down substantially and hence the subsidy bill of the government will be reduced without reducing the quantum of subsidies.

Next another important thing will happen: once they have an account with the bank, they will come asking for a credit product which will help them get gainfully employed. That way we will be in a position to move people from agriculture to small businesses. Nowhere in the world has any developed economy survived simply on agriculture and services. If we have to move into the league of a developed economy, we have to improve our manufacturing sector. Unfortunately, the Indian growth story is not based on manufacturing. This is the difference between India and China. There the manufacturing sector is driving growth, here the services sector is driving growth.

So we have to change this because only the manufacturing sector generates employment. In the services sector one person is employed and technology acts as workforce multiplier. But you cannot grow the outsourcing business beyond a point. And, in agriculture, in any case you have to move people out of here because productivity is very very low. Moving large-scale manufacturing activity in the big cities, the small centres, in tier-2 and -3 cities, and micro-enterprises in villages, is a prerequisite for our growth.

Everybody understands the importance of financial inclusion. But are we going about it right? What are the issues? What are the problems? We have pushed through no-frills accounts rather aggressively in the last three years, still transactions is a big problem. They are all mostly dormant accounts which only add to the banks’ costs. So how does one get over this problem? Or is it something that you would expect in the first five years which will even out eventually?
The broad framework for financial inclusion is there. Fifteen crore new rural accounts have been opened. But banks cannot deliver financial inclusion in isolation. Banks can finance economic activity provided it exists there. Banks cannot create that economic activity. Without economic activity, even if the government transfers cash directly into their accounts, they will withdraw the money immediately. There will be no remittances. Without remittances banks will not be able to open up other credit products such as insurance. Who will take the insurance? Who will pay the premium? For credit growth to happen the rural poor need to be employed. Of course, one thing is there, the platform has been set, even if there is activity in some accounts that will start off a trend and it will be good for the country. Because, ultimately growth in any country which is not inclusive growth becomes a challenge on its own, a social challenge particularly.

So what you are saying is that financial inclusion is not possible without concomitant developmental activity?
Absolutely. If you look at the preparedness of the bank in financial inclusion, as far as the targets and deadlines are concerned, we have never lagged behind. Even if you talk about the direct cash transfers, we were asked to open the accounts, we opened the accounts but so many people have not got Aadhaar cards. Just this morning (in early January) I read in the papers that 4 crore cards are waiting to go to printing.
So, it should be a collective effort on the part of all the departments. Whatever role is assigned to the banks, we are doing it. Most of the accounts are dormant but still we have opened more than 15 crore accounts. But most of the accounts are dormant. If we are to give them a credit card then for that product you have to create an environment. We can’t give them credit to buy food, can we? Credit has to be for a business activity. We can lend only for commercially viable business activity. It is the duty of the state government or the municipal authority or the urban development body to create those opportunities. Right now, those opportunities are not there.

So how will we solve this chicken-or-egg situation? How close are we to solving it?
MNREGS is transferring huge money to into the hands of the rural poor. If this can be clubbed with certain government schemes... but it is not creating any lasting asset. If we can remodel it in a fashion where some assets are created then you can create opportunities. Let’s take a very small example of constructing a toilet. First of all you will employ labourers, supervisors, you will buy material and transport it, all of which is productive economic activity. And once the toilet is constructed, you will need permanent staff for its upkeep. Similarly for roads and other infrastructure. One thing will lead to another and that will create an economy in and around every village. Then banks can come in to provide credit.

Let’s talk about direct benefit transfer. Considering that the financial inclusion itself is kind of a non-starter, and UID has still not been rolled out very well, do you see a rough ride ahead?
First of all, you cannot say that financial inclusion is a non-starter. From our side it has started and started very well. But I do think somewhere we have missed the opportunity. Financial inclusion and UID should have run in tandem, complemented each other. Instead they ran parallel. So see what has happened. We (banks) have moved deep into the villages, we have obtained all the particulars of that rural population and opened their bank accounts. Now to make these accounts Aadhaar-enabled, we need three or four extra fields. If our drive and UID had been matched initially, all the 150 million accounts we have opened could have been Aadhaar-enabled from the word go. The financial inclusion mission started three years ago and Aadhaar was also conceived around the same time. Most banks are owned by the government of India, Aadhaar was initiated by the government of India. So these two could have started simultaneously.

Aadhaar was enrolling somewhere and banks were opening accounts elsewhere?
Yes... had we collaborated, today’s problems would not have arisen. Now banks are ready with the accounts, a few people are ready with Aadhaar numbers, we have to match those now. We have enabled our technology such that if a person comes to the bank and gives her Aadhaar card, we can feed the number and her bank account will be Aadhaar-enabled. But the problem is that banks have to now feed these numbers for 25 to 30 crore accounts and that is a huge challenge.

Now that licences are about to be given for new banks, how will that change the dynamics of the market? Is there enough space in the market for more?
That depends upon kind of licensing conditions that are set [this interview was conducted before RBI announced the new licensing norms – editor]. If RBI stipulates to ensure a level playing field for the public sector banks, then it will be very interesting to see who are going to operate in the rural area. If there is no level playing field and they (new entrants) are given licences without any obligation on their part to open branches in rural areas to do the priority sector lending and set target by micro-lending for the weaker sections, then it will not be a level playing field. Then all the lucrative business will go to these banks and the public sector banks will be asked to do financial inclusion. Then the public sector banks will become training fields for private banks to poach trained manpower, which is already the case anyway.

If financial inclusion is about reaching the smallest of the retail customers, is it a fundamental mismatch with the business ideology of a bank?
Let us not create too much hype that financial exclusion is the responsibility and job of the banks. I again repeat it is the collective responsibility of the society, central government, state government, local governments and other businessmen and then the banks. The banks have created a platform, an excellent platform. Even if we accept that 60 percent of the Indians are financially excluded, it means that 70 crore people don’t have accounts. If you take the average size of a family as five, then there are 14 crore families without bank accounts. In the last three years, 10 crore accounts have been created, that leaves only about 4 crore families to still to be covered. But the point is what are we doing with the 10 crore we already have? The challenge before everybody is to activate these accounts so that some gainful transaction happens, that the account holder gets some benefit out of it. That the passbook should be a weapon of empowerment in their hands. Getting that passbook should mean something to them. We have to create an environment wherein the money is used for commercial productivity and that the person earns something out of it. She takes '10 out, spends three, eight comes back, then again she uses '12 which become '18...that is what should be there. Lending money is an easy job but you must have a business to use it. We need to build an economy and inclusion will happen on its own. n

* The loans that banks give (credit) are drawn from the money that customers park with them (deposits). They pay depositors less interest and charge creditors (loan seekers) greater interest. The interest differential is the profit of the banks. More the banks lend, more the profit they make. But the ability of the banks to give more loans (credit growth) is necessarily determined by the strength of their deposits. A large deposit base enables them to have a large credit base. So, banking is a fine balance between deposits and credit. So, a sluggish economy with a muted demand for loans (credit demand) should normally result in growth of deposits because businesses and individuals are not spending their money. But this is not happening now. Deposits are growing only at 13 to 14 percent while credit is growing at 16 percent. This is not a healthy sign because if it continues over time, it will limit the banks’ ability to lend.

(This interview appeared in the March 1-15 issue of Governance Now magazine as part of a special series: Bank India Bank)