Rural Banking: Speed and stability can bolster drive

By Dr B K Mukhopadhyay

The World Bank in a very recent report on remittances has been of the opinion that India’s move to set up 11 new payments banks is expected to expand penetration of the banking sector in vast rural areas of the country, Accordingly,  “The decision by the Reserve Bank of India to grant ‘in principle’ approval for 11 entities to set up payments banks, which would be directed at small savers in underserved (largely rural) markets, could help transform the rural remittances market”.

Incidentally, it may be mentioned here that these banks would be subject to regulatory requirements that limit credit risk, (75 per cent of deposit balances are to be in eligible government securities or treasury bills, while loans, credit card issuance, and acceptance of non-resident Indian deposits are prohibited) but would be subject to lighter prudential norms (minimum paid up capital of about USD 15 million, compared to five times that amount for universal banks).

It must be appreciated that in India the banks have been positively responding and implemented the Government’s target to bolster credit flow to the farm sector as well as S M E sector. Rural banking has been gaining ground through SHG / SGSY group formations, bank linkages, fincial inclusion as well priority sector fincing plus expansion of branch network, among others. On this score, not only in India, but for other developing economies also [Bangladesh, Philippines, Vietm, Sri Lanka, Gha, among others] the going can be termed as good.

The welcome move is on to ensure adequate credit flow to productive sectors, prevent liquidity crunch as well as to level out loan portfolios. The banks are increasingly aware as to even out their loan portfolios so as to ensure adequate credit flow to productive sector, while prescribing deposits mobilization to head off a possible liquidity crunch. Rebalancing is a pre-emptive step. Efforts are on to rebalance the credit portfolios to see that the productive sectors are not denied credit as otherwise there remains the possibility to suffer from liquidity crunch. Already the overheating signs have been noted.

More than deserved growth is there in sectors like: housing, persol loans, commercial real estates, credit cards, which, in turn, has been witnessing significant credit growth. Banks were also asked to rebalance the portfolios identified by RBI to make sure that the productive sectors, agriculture, in particular, is not deprived of its due share. This, no doubt, could help foster the very growth of the economy and bring in high growth momentum. To sustain a credit growth of 25 percent the banks are to ensure that the deposits grow by at least 25 to 30 percent. It is clear at this moment that the overall deposits growth in the recent past had been trailing behind credit growth and the crucial need is there to catch up at the earliest.

FINCIAL INCLUSION

Inclusive growth is the current compulsion of a sound public policy. It is true that there has been a convergence in the business interest of the banking community in fincial inclusion. As things stand today, India’s banking sector is on the verge of becoming complaint with Basel III standards and the fincial sector reforms are on. Though there has been weaknesses – undercapitalized commercial banks, problem ridden [ but potential ] cooperative banks - yet the very aspect of fincial inclusion has been running well in tune with the fincial sector reforms now underway. Fincial inclusion is to be treated as a business investment. Banks are to move to the masses as a tural process of fincial inclusion. It is a fact that to ensure stability on the liabilities side of business, banks are to focus on expanding retail deposits base. This obviously includes taking deposits from rural and semi-urban regions of the country.

For the banks the real need is there to focus on small loans to the farm sector and small and medium enterprises and smaller liabilities since the large corporates are already steadily getting dis-intermediated and have already begun to directly access the fincial markets. However, the practice is already there and banks are in the process of fincial inclusion very much- opening and operating rural branches, rural coverage, agri-lending, SHG bank linkages, social onus of banks, etc. The process has been given the right me ‘fincial inclusion’ [the theme already existing in developed economies like France, UK, etc].

Still, to bring the farmers under the ambit of fincial inclusion the increasing role of commodity exchanges in the matter of providing forward market linkages and price discovery is being largely felt. This very process could succeed if banks and exchanges work together. Active market support providing is that what is urgently awaited. Side by side, banks and fincial institutions which have been intervening in the Forex as well as in the stock markets now need to extend active participation in the commodities market. Introducing specialized fincial products and reach out to farm households with holdings of less than one hectare could definitely extend the outreach. The growth process should be widespread as well as sustained.

Micro-approach Paying Dividends

A credit-plus mechanism could help repay the loans easily. No one can dwell better than banks on inclusive growth and as such the crucial need is there to percolate intensively among the poor. It is to be kept in mind that even though the GDP growth rate was 7 percent, yet the rural economies recorded only a palpable 2 percent! So, the incidence of regiol imbalance does not rrow down.

It should not be forgotten that banks are one of the wheels of development- other wheels have to move simultaneously (viz. rural electrification, marketing, storage, communication, technical consultancy, etc.). Otherwise lower rate of growth would go on repeating just. A crucial need is there to implement farm modernization programmes as well as bolstering productivity, efficiency and profitability. Land use dimensions call for a new look. Simply asking the banks to double the flow of credit to the agri-sector is necessary but not sufficient, obviously enough! Government’s efforts are definitely on but a scientific updated approach is urgently awaited.

The ultimate thing remains - how the recovery of loans takes place – the path of recycling of funds is made smooth and widened. There is exactly nothing known as free lunch! Banking is a business venture too!

It is business with social onus after all

Business processes must become more mature and the Institution must be able to deliver higher performance-spatially, temporally, hierarchically and functiolly. Obviously, to achieve the same, the starting point is designing [the comprehensiveness of the specifications as to how the process is to be executed]; followed by the performers [people executing the process based on skill and knowledge]; owner [persons shouldering the responsibility for the process as well as the results]; infrastructure [information/MIS that support the process]; and of course the metrics [the measures the company uses to track the process’s performance].

Boosting of service quality, keeping in view the very ture of effective demand, is the crying need. Quality refers to summing up cost and time. Changing any one of these variables would lead to change the outcome. If the amount of time is shortened to complete the assignment, either the cost is to be increased or quality is to be lowered. Quality refers to identifying the quality standards relevant to the assignment and determining how to measure and satisfy them.

The challenge, therefore, remains threefold: acquiring the right technology, deploying it optimally and remaining cost-effective whilst delivering sustaible returns to shareholders. Thus, maging technology so as to reap the maximum benefits remains a key challenge for the Indian banks!

Training, monitoring and other supporting services should tackle change magement aspects and banks have to assume higher updated responsibilities in the are of extending technical assistance, ably backed by monitoring and evaluation throughout the entire process, which, in turn, could help promote the building of sustaible micro-level associations and of self-help-groups, so that these associations in the course of time, will be able to take over functions which are related to planning and to technical assistance (decentralization).

Obviously enough: it’s a tough job for which systematic planning by the real knowledgeable planners [and not the so-called micro-expert having low-level knowledge and poor alytical skills] who could effectively make use of regiol planning techniques.

Filly, conventiol studies on rural societies, at least in the area of development studies, have tended to alyze roles of communities by perceiving a rural community as an organization. This perception is definitely useful when focusing on only one economic activity, i.e. agricultural production. New approaches must be sought to evaluate multi-functiol roles of communities in alyzing today’s complex socio-economic situations in rural areas. The fince world today has to count on the fast changing rural-urban business environment.

(The writer, a noted Magement Economist and an Intertiol Commentator on Business and Economic Affairs, Director, Netaji Subhas Institute of Business Magement, Jharkhand, can be reached at m.bibhas@gmail.com)