India is a poor country and will remain one for a long time, says Dr Nachiket Mor, a member of the RBI’s central board of directors and head of the committee on comprehensive financial services for small businesses and low income households (CCFS) which submitted its report in January this year. In a candid interview with Srishti Pandey, Mor argues why it is important for banks to work around different economic considerations, how Aadhaar and telcos can be used to clear the logjam between banks and customers, and why one good idea is just not enough to satiate the needs of the vast Indian market. Edited excerpts:

RBI deputy governor Dr KC Chakrabarty aims to provide bank access to every household by 2016, while you say that every adult individual should have a bank account. Is he being overly conservative or are you being too ambitious?

I think what we both say makes a lot of sense. Clearly, the unit of interaction is the household. The presumption is that the head of the household will be the person who will borrow money, and do other banking activities. The opportunity that we have today from which we can benefit is that there are almost a billion mobile phone connections in the country. All the telcos have fulfilled the know-your-customer (KYC) requirements in some form or the other. In fact, RBI itself requires no KYC for accounts below Rs 50,000. Also, Aadhaar is doing a lot of work in terms of collection of data. So we suggested that this data can be used to create an account in the cloud right away by partnering with the UIDAI. And if Aadhaar is not working then we can look at mobile portals because these mobile phone companies have already got 700-800 million customers and so one can even argue that if we go in that direction, 2016 is too long. If on the other hand banks continue to say that they want a formal structure for reaching out to the unbanked areas then that could even take another 30 years. What Dr Chakrabarty has in mind is comprehensive inclusion and that even we agree will take longer because it is not clear that everyone wants credit and so banks will have to go the old way to give credit. Our targets are more around opening accounts and payments which can move quickly.

You have based your 2016 target on the success of Aadhaar but the UID initiative is facing multiple challenges.

The UIDAI are at a run-rate of about 10 lakh customers per day and by May they are likely to complete 70 crore. So if they are generating a million numbers a day then by 300 days they should get done.

But generating the Aadhaar number is not enough. A customer will still have to go to a bank to activate an account.

What we are trying to do through this mechanism is to break the logjam of who goes to whom first –whether it is the customer going to the bank or vice versa. It is about short-circuiting the process. Leveraging Aadhaar or telcos is an easy and low-cost pathway.    

Your panel is strongly in favour of leveraging mobile technology but what about this turf war between telcos and banks in terms of sharing customers, revenue model, etc?

In one of the recommendations we argue that the current strategy which we follow is perhaps the riskiest. We have created Airtel Money as a PPI [prepaid payment issuers] where we have told them that they cannot get a cash-out. Whatever money they collect has to be put into an escrow account. We argue that for a customer it creates risk because once I open an account with Airtel Money and later decide to close it, I will not be able to take the money out. I’ll have to spend it somewhere. The second point is that, for example, Airtel Money opens accounts for all of its 200 million customers; then in its current structure it becomes 20 times bigger in terms of the number of customers than its host bank. Now, if Airtel Money fails for some reason, even the host bank will fail and vice versa. We thus argue that it is safer to snap that relationship (and interdependence) between banks and telcos. If a bank wants to create a payments company it should be allowed to create a subsidiary of its own and operate with it. Airtel Money, we feel, should be allowed to become Airtel Money Bank so therefore there is no link with any bank and instead of putting money in an escrow, they put money in government securities and are regulated like any other bank.

But are there many takers for this model?

Our sense is that this is the way forward for them to grow. It is because even after five years of operations, Airtel Money only has 40,000 cash-out bank accounts out of 200 million Airtel customers, and this is ridiculous. In other countries the same players have gone ahead and become huge players – in not just four countries but in Europe also there is a movement towards non-bank companies. So if you take two potential competitors and ask them to collaborate, then the business doesn’t grow. Each must be left to do their own things and while there will be some competition for margins, this is more of an additionality.    

If banks claim that they have realised the business opportunity of FI and are looking at it with seriousness, why do we need other institutions?

The thrust of our report is that there is no one good idea. So it depends a lot on the banks and dynamics of an area. Different entities do well in different areas and it is about adopting the right model for the right place. For example, in Punjab, where banks were always doing a lot of lending, they would be more than happy to do FI there.

You call the payments banks a safe option. Some bankers think it is a risky model and the product of our impatience for results which could be destructive for the entire ecosystem. Your views?

Clearly, we take the same view of the PPIs that are there today. So, maybe, what some of these bankers are saying is that shut down Airtel Money, Vodafone M-Paisa and the others. But what we are arguing is similar to them, that it is better to make them a bank. A payments bank effectively is like any other bank but which says that it will not lend money and instead buy government securities from whatever deposits it gets.

There is some talk of expanding white-label ATMs to tier-3 and -4 areas despite their slow roll-out in tier-1 and -2 areas. What is the logic?

We are not talking about white-label ATMs and are instead talking about white-label BCs. BCs already exist on the ground and when we spoke to them during the drafting of the report the common complaint was the viability aspect. As a BC of a bank for instance, he/she can only serve say 20 percent of the villagers who are customers of that particular bank. So in order to bring about viability, it would make sense to make these BCs white-label BCs who could service all the banks and thus cater to 100 percent of the villagers no matter which bank’s customers they are.

For viability and better retention of BCs, shouldn’t banks instead explore the option of giving these BCs permanent employment?

The panel certainly believes in the notion of a bank in a bank. So instead of BCs becoming an employee of a bank it makes a lot of sense for banks to create specialised units inside the bank that have a different focus, pay structure and the BCs are a part of this group. The challenge that banks have found is that while initially you may start like that you end up facing the old troubles where there are unions, strikes, etc., and the pay scales become the same. And that is why people have liked the notion of an agent who is not on your rolls. So one way to solve the viability and retention issue is to make the BCs your employee but effectively you are also raising your cost structure. Instead, it is better to look at adjacencies. Today, banks are in talks with CSCs, mobile recharge outlets, etc and that is because these entities have adjacencies and multiple sources of revenues. This is a more promising mode. It is important to bear in mind that one challenge of India will remain, we are a poor country and will remain a poor country, at least on the per capita basis, for a very long time. It is thus unrealistic to expect that we will have a lot of customers who will keep huge sums as balance in their accounts and so we will have to find low-cost methods to reach out to these customers. And this is why the payments banks look attractive.

MFIs have existed for long and have done well. But do you think with greater banking penetration a few years later, MFIs should rethink their business model and consider becoming BCs or banks?

What we recommend is that just like we are talking about PPIs becoming payments banks, we recommend that MFIs should become wholesale banks so that they become a part of the banking system, can continue with their business model of wholesale borrowing and lending and maybe in four-five years if they can demonstrate that they can run this business successfully, they can apply to become a full-service bank.     

Your report also argues that the regulator should be a referee and not a captain always directing banks. By that logic, we should also do away with this norm for 25 percent branches in rural areas.

We did spend a lot of time debating this question during the committee meetings. Most bankers felt that this norm has been fruitful because otherwise there is so much opportunity everywhere that banks may not need to go beyond urban centres. What we put down, therefore, is that branches need to be defined more flexibly. So the RBI should continuously evaluate if the norm is necessary as more and more players enter the sector and a lot of inclusion activity has happened.

What about this perception that private players are not doing enough and still treat it as CSR?

When there were only small private banks, one could take that view. But a large private bank with a Rs 5,00,000 crore balance sheet out of which 40 percent is coming from rural areas will have to do financial inclusion as a serious business; if not there will be defaults and they will have to shut down the bank. So I think everybody is trying their best to do this business as well as they can.

We have spoken about the supply-side of banking services but what about the demand-side?

The panel believes that there is a lot of latent demand. We don’t find a shortage of demand for savings, payments or even credit for that matter. The challenge has been our ability to ensure good supply because we make access so hard that the moneylenders and adtiyas (conduits) continue to flourish. Banks may feel that Rs 1,500 is too small an amount but it is important to remember that everybody’s economic circumstances are different. If we take the example of a mobile recharge shop, customers can recharge for the smallest amounts and they are not turned away by the mobile companies. So we are saying that the same technology should be deployable even for banks.

(This interview first appeared in the magazine's March 16-31, 2014 print edition)