INCLUSIVE GROWTH MEANS AFFORDABLE FINANCE

KAMLESH PEDNEKAR

Financial inclusion can provide an identity for the poor and those in the unorganised sector and at the same time help lift their standard of living, says Usha Thorat, deputy governor of the Reserve Bank of India (RBI). As she nears the end of her 38-year tenure at RBI, Thorat looks back with satisfaction at her role in Indias most fundamental economic reforms. Excerpts of an interview with Sumit Sharma:

product but it got profitable within a year with more products such as loans, insurance, government payments and remittances. RBI plans to give new licences to banks in the private sector. What role do you see for them in financial inclusion? Financial inclusion in underserved areas is one of the important reasons for new bank licences. We, therefore, expect applicants to look at inclusion as a business opportunity. We would leave it to the innovativeness of the aspirants. We have asked stakeholder groups to seek a dialogue with us on the discussion paper.

Q&A
Usha Thorat
Deputy Governor, Reserve Bank of India
Financial inclusion is one of the projects about which you are passionate. What can it potentially do for Indias all-round progress? Inclusive growth is not possible without access to affordable finance, which is very limited especially for unorganised, micro and small entrepreneurs, and self-employed people. Its an important objective to improve the standard of living. A bank account gives a person an identity and access to several other things such as becoming part of a payments system, remitting funds, getting government benefits, or having deposit-insured savings Are the poor missing out on Indias GDP growth? A large number of people are being lifted from below the poverty line. They can productively utilise their capacities if they have access to finance. One is not necessarily talking about those at the absolute bottom of the pyramid. Its a challenge to bring into the banking system those in the unorganised sector with no antecedents. One way is to encourage them to save, develop a record of savings and make themselves eligible for loans. Self-help groups will tell you that these people have proved themselves to be creditworthy.

How satisfied are you with the progress that banks have made so far in financial inclusion? Banks have been trying to increase their coverage. But there are limitations to a banks physical presence. The first task for banks is to reach all villages with a population of 2,000 or more. There are about 100,000 such habitations across the country, of which about 35,000 have bank branches. The Business Correspondent (BC) model will work there Where do Regional Rural since brick-and-mortar Banks (RRBs) and Lead Its a challenge branches may not be viable Banks figure in the agenda in all such locations. In or- to bring into the for inclusion? der to ensure that the BC financial inclusion plan banking system The model is viable, we recentinvolves allocating about those in the ly permitted banks to collect 73,000 villages to various reasonable service charges banks for establishing their unorganised from customers in a transpresence. RRBs are also very sector with no much a part of this. Of the parent manner for banking services delivered through 73,000 locations, about 48,000 antecedents BCs, and removed the ceilhave been identified for pubing on interest rates for loans lic sector banks and the rebelow `2,00,000. There is proven tech- maining will be RRBs and private sector nology now and banks have core banking banks. This task of establishing a pres(solution). All these factors are enabling ence through branches or BCs has to be banks to scale up significantly. We are al- completed by March 2012. In the first so exploring whether retail distribution round, banks just went ahead and opened networks of companies in rural areas can no-frill accounts and werent able to debe leveraged by banks as BCs, with suf- liver the services since the customers had ficient safeguards. to travel long distances. One has to put a more accessible banking infrastructure Do banks that operate on the field and in place and thats possible through the BC model. RBI have a convergence of views on profitability? Banks are working out various models Should break-even by banks be a for BCs. Corporation Bank is finding it priority, as RBI sees it? profitable to use individuals. Other banks Financial inclusion cannot be sustained found that it wasnt profitable with one unless it breaks-even. I dont see any

reason why it shouldnt break-even. The kind of profit margin microfinance companies gets shows it is profitable even with lower margins. Now with banks being allowed to charge a reasonable commission and freeing of interest rates, it should not be difficult to develop a viable model. In fact, since banks costs and margins are much lower, the lower cost of delivery is expected to lead to more and affordable credit. I would certainly think there is a business proposition there. Will this initiative also help transform agriculture that has been a laggard for more than a decade?

Credit has increased significantly to the sector but one doesnt see a commensurate increase in productivity. Agriculture requires public and private investment and needs more technology, inputs, connectivity and infrastructure. How can potential bubbles in the economy be prevented, such as those in property? Today funds are flowing from all directions. Its difficult for us to be able to say well be able to control potential bubbles. We ensure that banks exposure is monitored closely and that they have risk-management policies in place to identify and limit risks and exposures,

and that in the event of some stress they have the capital and the buffer to withstand that. We want to ensure that the banking system is resilient to different kinds of situations that the economy may go through. How does it feel to be at the central bank for almost four decades? I have spent 38 years with the central bank 19 pre-reform and 19 post-reform. One couldnt have imagined the changes that have taken place in the post-reform period. These have been very exciting times. I feel most privileged (to be part of this process) and excited. The future is so bright for India.