PJ Nayak, MD and country head, Morgan Stanley, has called for a bigger role for non-banking institutions in fostering financial inclusion, saying it would result in a more diverse financial ecosystem. Nayak believes that projecting banks as the central thrust of financial inclusion may not really work.
Speaking at a panel discussion on ?New bank licences: A framework for reforms and competition in the sector? at the FE Best Banks Awards, Nayak observed that ?just like a commercial bank can?t work like a moneylender, similarly, a commercial bank would find it very difficult to work like an NBFC specialising in truck financing. I would say that the counterfactual tells you that Shriram Transport Finance is an extremely good example of financial inclusion. So, we should, at the very least, be saying that financial inclusion requires a broader set of financial corporates to actually participate in the process and it?s not even clear to me that the apex of this has to be the commercial banking system.?
According to N Sivaraman, president and wholetime director, L&T Finance Holdings, with the compulsion to open 25% of branches in unbanked areas, the only business model that would work would be one that fostered financial inclusion. However, Sivaraman pointed out that banks also needed to find a way of enabling the local commerce to use banking facilities without using actual cash. ?Actually, cash has been a bane in the rural areas because it increases the operating cost and the risks associated with that. If somehow we could work to make the cash disappear form the system and enable all commerce through bank transfers and an electronic system, that will make life simpler for all of us,? he said.
Nandan Nilekani, chairman, Unique Identification Authority of India observed that the advantage that new banks would bring, because they will be greenfield ventures, with no legacy issues, would be a discontinued business model and potential game changers. ?The entire value proposition of financial services today can be electronic, whether it?s opening an account, verifying identities, sending money back and forth or credit checks; and so, the way a bank is designed would be radically different. The banks which get that right will be the ones who will succeed,? Nilekani observed. He added that if the number of digital transactions could be increased, where people make electronic transfers, account to account transfer, then it would definitely reduce the cash in the system.
Shikha Sharma, MD and CEO, Axis Bank, observed that even if banks really wanted innovation today, the issue was that there were so many constraints in terms of micro regulations that banks have to deal with. ?There is the need to have 25% of branches in unbanked sectors, priority sector lending and within that multiple segments; so, you can come up with any number of innovative ideas and they will hit this hurdle of regulation,? Sharma said.
However, Sharma said it was inevitable that existing and new banks are going to roll out new products to those customers who hadn?t accessed financial services products before. ?To make it viable, we need to look beyond just savings and have the full gamut of services in order to make it more profitable to service that customer. I think the UID is something transformational and can make a big difference. I think having credit infrastructure is very important and a decade down the line, the market will look different,? she pointed out.
Nilekani observed that all the pieces ? demand, supply, technology and new business models ? were coming together. The Business Correspondent (BC) policy of the Reserve Bank of India, he pointed out, was the right one that will use technology to make remote transactions possible. ?Mobile banking is reaching almost universal coverage and the government will play a big role because there is something like Rs 300,000 crore of subsidies and individual payments, which do not flow through banks. If that amount can be paid electronically, it will be a revolution and a dramatic shift from wholesale to retail transactions.?
S Krishna Kumar, MD, State Bank of India, said the bank?s experience with the BC model had been pretty good in the sense that there were a large number of transactions taking place through these customer service points. However, he added that the model didn?t always work because there had been instances of people running away with money taken from the villagers. ?The remuneration model for a BC has to be good; otherwise, he might not be motivated enough to continue with these banking transactions for a particular bank. We need to get the model correct in terms of what we need to pay the BC for the transactions,? Krishna Kumar opined.
Stressing the need for financial diversity, Nayak said, good quality institutions in each one of the non-banking segments should be able to offer savings products to customers. ?The thrust of regulatory policy for the last several years has moved away from this to saying that the only deposit- taking institutions we are comfortable with is a commercial bank. That?s partly because regulators are naturally apprehensive about collapses in small institutions. But we shouldn?t be tarring everyone with the same brush and the good-quality institutions should be encouraged, as much as banks are, to actually pursue this goal of financial inclusion.?
Watch out for the full coverage of FE Best Banks Awards event in the edition dated September 21
