Financial Inclusion Over The Decades

Financial Inclusion Over The Decades

Jawhar Sircar

Sanko, Bandhan Bank, January 2018

         

              I was in college when Indira Gandhi nationalised 14 private banks in 1969, and there was wild cheering. Even students like us who were not in the Economics department could understand that the avowed purpose of this dramatic measure was to ensure that the savings and other funds deposited by citizens and businesses in banks were utilised for the greater public good. A few years later, I joined the Indian Administrative Service or the IAS in 1975, after giving up a far more lucrative private sector job in a fit of youthful patriotism. Most of us were determined to serve the nation rather than some private capitalists and we were keen to do something for the poorest of Indians. In those days, the central government and some state governments had several schemes, projects and missions to attack poverty.  Socialism was at its height those days that these top-down schemes were meant to ensure that the poor were attended to. In the districts that we reported for duty, we had specific targets under the ‘Garibi Hatao’ (Remove Poverty) pledge and there was also a detailed ‘Twenty Point Programme’ to lift the masses out of poverty that Indira Gandhi had introduced. But, as soon as she was defeated in 1977, all priorities and labels changed.

           The next Janata Party coalition government also plunged into welfare for the masses in their own way and we we were then directed to put our heart and soul to ensure that the new Integrated Rural Development Project succeeded. We had practically to force the nationalised or Public Sector banks (PSBs) to advance credit to the poorer sections, that could hardly mortgage any property. The traditional Public Sector Banks were not mentally geared to reach out to those who had no or little collateral and branded them as “un-bankable”. The poorest had to be helped and they were identified by the district officers, often in consultation with peoples’ representatives and they were to receive a certain amount of non-repayable government subsidy and a larger matching component of bank loan. Many of these anti-poverty schemes were also taken up by Regional Rural Banks (RRBs) that were set up by the designated ‘lead banks’ under orders of the Central government. These RRBs functioned in almost all the districts and they were meant to introduce a definite “rural” bias in both picking up deposits and in advancing credit. This helped penetrate hitherto untouched areas of India and un-banked ares and the enthusiasm with which several sectoral officers worked among the masses was indeed commendable. As Sub Divisional Officers, then as Additional District Magistrates and, later, as District Magistrates, we were all involved in holding regular monitoring meetings with the RRBs and the larger PSBs to reach the lowest layers with genuine measures to lift them above the ‘poverty line’. Frankly, the PSBs continued to be very reluctant in advancing any loan to the poor who they did not consider credit-worthy at all. This mentality of the public sector banks was far too overwhelming in the RRBs as well, which made our progress difficult. And though some RRB chiefs and senior officials fought against this mindset, it was, only a matter of time that the early missionary zeal was replaced by bureaucratic complexities. I remember the utter discomfiture of the representatives of the banks who were severely criticised in every monitoring meeting in the districts and sub-divisions. In fact, they were sometimes pounced upon by the elected members of the legislative assembly or the panchayats for their reluctance to pay loans. We protected them to the extent possible, but we could also decipher at times the in-built reluctance or cynicism of the bankers in advancing loans to people who did not fit into their description of being credit-worthy.

     For several years, other multi-pronged attempts were made by government and the Reserve Bank to instil a sense of duty among bankers to reach the poorest strata to help them be more productive. At times, almost coercive measures were used by the political bosses. Union Banking Minister, Janardan Poojary, for instance, organised regular “Loan Melas” where bankers were made to part with funds almost under duress and these alienated the bankers even more. These were called ‘poverty alleviation’ measures then — as the term ‘financial inclusion’ was not in vogue in the 1980s and 1990s. Besides, they had seen that when large scale loans were given under pressure, many unscrupulous elements disappeared with their money or did not generate enough economic benefits to repay their loans. One exercise that would have been interesting in those days, and even now, and this to compare how much the banks actually lost on account of these anti-poverty schemes and the amounts they lost because more powerful industrialists refused to repay their loans. It was typical of the latter to engineer the sickness of their own industries, after siphoning off its funds through over-invoicing of purchases and under-invoicing their sales realisation.

        Another fault of the system was the top-down paternalistic approach that it entailed. Once the poor were ‘identified’ by the Block Development Officers and their officials, and were told to apply to the banks for assistance, all decisions about which schemes or projects would suit them or were to be given to them were made by officials of different departments,— not by the beneficiaries themselves or by the bankers. In states like West Bengal, people’s representatives at the Panchayat level. Different departments like fisheries, small scale industries, agro-processing, women’s welfare, handlooms and so on were given specific targets to fulfil and they were more bothered about utilising their department’s allotted subsidies and about meeting targets than about credit-worthiness and capabilities. This target fulfilling could only happen if the banks extended the matching loans and hence, the pressure on them. It is also undeniable that the very large number of small loans made the entire operation too cumbersome and unwieldy to handle, with the limited amount of manpower that these banks had. Besides, public banks with low productivity (that was partly due to excessive paper work and complicated rules) and relatively high wages found the whole idea to be  very costly, in administrative terms.

         Everyone was fully aware that this large informal sector of the economy was serviced by money lenders who had thrived for centuries because the formal banking sector found it extremely difficult and uneconomical to penetrate the bottom half of the pyramid. Even a few years ego, Sadhan Kumar Chattopadhyay stated quite clearly in the RBI working paper entitled ‘Financial Inclusion in India: A Case Study of West Bengal’ (2011) that “moneylenders are still a dominant source of rural finance despite wide presence of banks in rural areas.” In two thirds of such cases, he noted that moneylenders lent at interest rates as high as “10-20% per month” and even this was doubled if it was not repaid in time. This bottom segment of the pyramid that is so vulnerable to loan sharks, incidentally, contains much more population that the top half. Even though moneylenders openly charge cut-throat rates of interest, no one was willing to bell the cat.

        This is the mission that Muhammad Yunus took up from the early 1980s in Bangladesh that became popular as ‘micro finance’. It has gone through several variations and adoptions in the Indian sub-continent and in the rest of Asia and Africa. It consisted of reaching the small man instead of waiting for him to become bank-worthy and line up at the counter as these were next to impossible. Yunus and those who followed him proved quite conclusively that small doses of finance could do wonders to these struggling millions who have no access whatsoever to some sort of organised capital and have historically fallen prey to moneylenders.  These teeming millions, who range from the petty tailor or cobbler to the basket maker or the vegetable seller, could ramp up their operations and increase their own productivity and earnings if only they could get a little loan, without going through complications and dilatory banking or other official procedures. The Central government realised the efficacy of this approach and encouraged the setting up of Self Help Groups (SHGs) of poor beneficiaries, especially women, who could work in clusters to gain some possible synergy and also stand guarantee for the loans extended to individual members. In 1999, the SGSY or the Swarna-Jayanti Gram Swarojgar Yojana was established to encourage villagers take up more self employment through Self Help Groups.

       Another major problem that appeared on the horizon, especially in states like West Bengal, was the mushrooming of Chit Fund Companies that offered fantastic rates of interest to borrowers to entice them to keep their life savings with them. They followed the “Robbing Peter to pay Paul” principle, which meant that they utilised fresh deposits to pay off earlier deposit-holders, which was impossible to sustain beyond a point. Thus, when they were caught or exposed, the promoters tried to escape with whatever wealth they had cornered, but thousands of trusting deposit holders were devastated. I remember that when I was Special Secretary in charge of Institutional Finance in the Finance Department of West Bengal from 1993 to 1995, one of our prime tasks was to stop these chit funds from duping the masses. They were often quite powerful and went to the courts for orders against us. Government was, however, determined and we swooped down on these firms and made large scale arrests and seizures. Some of these big owners like Sanchayita and Sanchayani moved the High Court and the Supreme Court for legal redress but justice came to our side. The problem of how to tackle thousands of cheated investors was indeed very painful and we were under considerable strain.

      The Reserve Bank went in for several measures to tighten up of regulations for NBFCs to Non Banking Financial Companies and for RNBCs, i.e., Residuary Non-Banking Companies. But the issue of how to operationalise financial inclusion remained, because while government could often tackle moneylenders under the law if officials at the lowest levels were clean and determined and local authorities could arrest chit fund promoters, it could not ensure financial inclusion. The banking system could just not collect small deposits from a million households nor could it lend to millions by going to their doorsteps. This is where micro finance stepped in and lent money to an unprecedented large number of household and to self-help groups. In the last two decades, micro finance institutions (MFIs) penetrated more deep into the countryside and among the urban poor than was imaginable.

           By 2006, I had moved to Delhi which gave me the opportunity and, in my new official capacity as India’s Development Commissioner for MSMEs or Micro, Small and Medium Industries, I had the benefit of observing quite closely how the micro finance institution worked. The Khan Committee Report of the Reserve Bank (2005) was being discussed in banking circles and serious note was of the practice of ‘financial exclusion’ that existed in the banking sector. This was when the RBI’s Governor, Dr YV Venugopal, officially recognised the term “financial inclusion” in RBI’s policy and the RBI demanded that banks review their existing practices to align them with the objective of financial inclusion. Dr Reddy did his best to expand credit to micro and small enterprises and he admitted that “existing banking practices in India tended to exclude rather than attract vast sections of population”. The RBI insisted on making available a basic "no-frills" banking account. I was then, incidentally, on the Board of the Small Industries Development Bank of India (SIDBI), where I learnt a lot about financing at the grassroots level. It was at this exciting stage that I got deeply involved in locating finance for the lowest tier of industry that provided for the maximum amount of employment at the minimum cost. It was also our endeavour to reach the bottommost strata of society with doorstep financing.

           Because the world of finance was dominated by big banks, the new experiment of MFIs were looked upon with a lot of suspicion. One of the southern states complicated this issue by rapidly expanding micro finance operations, but some MFIs indulged in speculative practices, which made the MFIs appear in the public eye as the new class of extortionist moneylenders. Both the state government and the RBI came down heavily on these groups and their modus of operations but the whole MFI sector came under pressure. At the same time, there was also a lot excitement as many policy makers felt that the MFI approach had the potential of providing a possible solution to the vexed problem of reaching banking services to the grassroots level. These restrictions continued to restrict MFIs and there were several pressures on the RBI to put a cap or limit on the uppermost rate of interest MFIs could charge. Equal attention was, however, not paid on masking available cheaper and easier funds to the MFIs so then they could then on-lend to micro-borrowers at reasonable rates. It was SIDBI that introduced me to the problems of micro finance and we were able to discuss problems threadbare at the policy-making forums in the RBI and in the government. SIDBI also had a system of rating MFIs that took assistance from them and this is where I heard of the pioneering work that Bandhan was doing in West Bengal.

           I left the MSME sector by the end of 2008 as I was promoted as Secretary in the Government of India, but I kept up my interest alive. I sincerely believed that if India was to convert its demographic mass into an asset and to avoid the pitfall of sinking with the disempowered bulk, then special and imaginative steps needed to be taken. Among the steps taken to ensure “financial inclusion”, very few programmes succeeded like micro finance did. It was good to see that the number of beneficiaries or borrowers rose from 35 lakhs in 2005 to 267 lakhs in 2010. But then, 2010 and 2011 turned to be really problematic years for the micro finance sector and its growth pangs went through its and the ups and downs, with policy shifts. The Community Development Finance Associations reported that the number of MFI branches fell from 13,562 in 2011 to 10,697 in 2013. The industry lost almost half its staff. The number of borrowers stagnated and slowly went up to just 275 lakhs  by 2013 but the loan portfolio changed very little between 2011 and 2013 (Rs 2470 crores to Rs 2570 crores). From 2014, the crisis started ending, and growth was resumed as the RBI became more pro active. In 2013, the IMF-World Bank noted that "financial inclusion is no longer a fringe subject. It is now recognised as an important part of the mainstream thinking on economic development based on country leadership."

      By 2016, the number of MFI branches had risen to 11,644 and the number of borrowers went up to 399 lakhs or 4 crores approximately. Their loan portfolio grew to Rs 6390 crores. But one shift was noticeable, i.e, as the rural markets appeared more problematic, MFIs had started lending in cities and the share of urban lending in MFI loans went up from one third in 2013 to two-thirds in 2015. Two positive developments have taken place in the recent past. In August 2014, Narendra Modi launched the Pradhan Mantri Jan Dhan Yojana which was operated by the Banking Department of the Finance Ministry which meant that public banks were bound to comply with its orders. At the inauguration stage itself, 1.5 Crore bank accounts were opened under this scheme, which was declared by the Guinness World records to be the world’s highest achievement in this domain. Guinness’s Certificate declared that "The most bank accounts opened in 1 week as a part of financial inclusion campaign is 18,096,130 and was achieved by Banks in India from 23 to 29 August 2014". By 1 February 2017, over 27 crore bank accounts were opened and almost ₹66,500 crores were deposited under the scheme and both figures have gone up since then.

      The other was that in recognition of its dedicated service to the poor through its MFI, Bandhan was given a banking licence whereas giant corporates like Reliance were not. This meant that it could source its own capital at lesser rates than those charged by lenders. It also had the benefit of having several lakh enlisted accounts under its MFI for several years that could now be rendered complete banking services, with the same bonding and warm  relationship.