Financial inclusion is a necessity, a pre-requisite for growth, says RBI Governor D. Subbarao
Is there a business case for banks to do the ‘last mile’ themselves in micro finance operations?
Urging them to ponder over this, the Reserve Bank of India (RBI) Governor, D. Subbarao, asked banks to look at the feasibility of ‘re-occupying the last mile’ in micro finance operations.
Pointing to the tendency among banks to outsource the “last mile” in micro finance operations to MFIs (micro finance institutions) and self-help groups, Dr. Subbarao said: “Can banks rely entirely on outsourcing? Isn’t there valuable experience to be gained by banks by dirtying their hands more and reoccupying the last mile?”
He posed this question to banks even as he admitted that the “existing model [of outsourcing] has worked, and one that we should pursue and refine.”
Dr. Subbarao was delivering Indian Overseas Bank’s (IOB) platinum jubilee commemorative oration on ‘Touching hearts and spreading smiles’ here on Wednesday.
Micro finance, he said, was a remarkable success in recent years. Yet, it had not been without concerns, especially about the quality of income generation support MFIs were offering. Allegations about usurious interest rates, coercive recovery practices and multiple lending led to Andhra Pradesh Government promulgating an Ordinance that was subsequently converted into an Act. This made more States to consider whether they should also clamp down on MFIs.
The RBI, he said, had accepted the broad framework of recommendations of the Malegam Committee, and consequently, created a separate category of NBFC-MFI. Among other measures, the interest rate that an MFI could charge a customer had been pegged at 12 per cent over the rate at which it borrowed from the bank, subject to a maximum of 26 per cent.
All these, he said, had helped restore calm to the MFI sector. The sentiment of investors, too, had improved. Nevertheless, the roll-out of the new regulatory regime had run into some bottlenecks, he said. Some MFIs were unable to comply with the qualifying asset criterion for registering as NBFC-MFI and, therefore, banks were reluctant to make fresh loans to them as such loans did not qualify as priority sector lending.
The Reserve Bank, the Governor said, was working on resolving these issues so that MFI operations could get back on track. The Centre, Dr. Subbarao pointed out, was also considering a legislation to comprehensively cover the regulation of the MFI.
Turning his focus on financial inclusion, the RBI Governor said by numbers the country ranked in the sphere below China, Kenya and Morocco. In terms of quality, much more needed to be done by banks beyond mere opening of accounts. “Financial inclusion is a necessity, a pre-requisite for growth,” he said, calling upon banks to provide efficient and sympathetic customer service.
An assessment undertaken by the RBI through its junior officers, he added, revealed that the outreach activities of banks were not reaching the weaker sections of the society such as SCs/STs and there was not much awareness among the grievance redressal mechanism of commercial banks and the RBI.
Business correspondents, Dr. Subbarao said, were not adequately trained. He wanted banks to go more into the hinterland as a measure of their commitment to financial inclusion.
On the deregulation of interest rate on savings deposit, he said though the experience had been satisfactory, it had not inspired in terms of innovation by banks. There was a need to make the savings bank account more customer-friendly.
Lending rate system
On the lending rate system, Dr. Subbarao said after the switch to the base rate system from the BPLR system, there still were problems, particularly with regard to lack of transparency in the customer-specific spread charged above the base rate.
“This is not acceptable,” he said, adding that it should be objective. A committee of the RBI would go into what the criteria should be to decide the spread.