Reserve Bank of India governor D Subbaraohas berated banks for eschewing low-value customers and small transactions. The central bank chief said that India ranks 50th in financial inclusion-below countries like China, Kenya and Morocco-as banks fail to see opportunity at the bottom of the pyramid.
"By and large banks have outsourced the 'last mile' to intermediaries such as microfinance institutions and self-help groups. This is a model that has worked, and one that we should pursue, and refine. Nevertheless, the question is, 'is there a business case for banks to do some of the last mile themselves? Can banks rely entirely on outsourcing? Isn't there a valuable experience to be gained by banks by dirtying their hands more and reoccupying the last mile?" Subbarao was speaking to bankers at a platinum jubilee function of Indian Overseas Bank in Chennai this week.
The governor said: "The general impression I got is that frontline branch managers treat no-frills accounts as a nuisance and low-income households as an intrusion into their time and their business. This is disappointing to say the least," he said. "Banks should look upon financial inclusion not as an obligation but as an opportunity to build fortune at the bottom of the pyramid. I am also conscious that the bulk of our effort so far has been from the supply side-opening branches, appointing business correspondents (BCs) and opening accounts that remain largely inoperative. If this is all that happens, the entire effort is both futile and wasteful. We need to supplement that supply side effort by a demand side effort-by reaching out to people left behind, inspiring their trust and confidence in the banking system and supporting them in improving the quality of their lives," said Subbarao.
Subbarao pointed out that in the first index of financial inclusion, prepared by the Indian Council for Research on International Economic Relations (ICRIER) to determine the extent of reach of banking services in 100 countries, India has been placed at the 50th spot.
RBI has said that bank branches should focus on financial inclusion and not leave the job for BCs. "I think there is a strong case for a much larger effort on innovating a cost-effective village branch model. Second, it is important that all BCs are trained in the use of technology, knowledge of bank products and processes, and importantly, in customer service," said Subbarao.
The governor said that the central bank's efforts at increasing rural branches by linking branch licences for tier-I cities with rural branches was being stymied by the mindset of bankers. "Unless banks are convinced that reaching out to the common man is not just a forced regulatory imperative but a potential business opportunity, the numbers will remain without life. The Reserve Bank looks forward to competition among banks to develop business models for such small, low staff and low-cost branches," he said
Pointing out that priority sector status did not provide any advantage in either the cost of funds or ease of access, Subbarao said: "The more sectors we include in PSL, the more they will compete for the same fixed pool of resources and crowd each other out. The priority sector can deliver on its promise only if eligible sectors are restricted to a select few which are important from the perspective of improving livelihoods."
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