In a candid interview with Srishti Pandey, Dr K C Chakrabarty tells why the financial inclusion passion continues to remain missing in some entities, how direct benefit transfer (DBT) has failed, and why public sector banks will have to play catch-up to private banks, which will lead the way for financial inclusion. Edited excerpts:

Financial inclusion 2.0 is about taking the leap from opening bank accounts to generating transactions in these accounts. Have banks been able to take this leap?

There are about 20 crore accounts which have been opened and there are another 20 crore accounts which banks have to open by 2016. So, the opening of accounts will always be important. I have always maintained that financial inclusion cannot be achieved by banks alone and we will have to get complete support from other stakeholders, including the central and state governments, NGOs, MFIs (micro-finance institutions), and technology providers. Also, there are inactive accounts but the ratio of these accounts to the active ones is steadily declining.

At present around 25 percent of financial inclusion accounts are active and the figure will steadily improve. As far as increasing transactions in these accounts is concerned, we have asked banks to focus on three things: savings, entrepreneurial credit and emergency credit. We have completed only around 20-25 percent of the job at hand – we still have a long way to go.

Transactions in accounts are the problem child for banks. Would you say enough progress has taken place on that front over the last one year?

I definitely feel significant progress has been made. Last year, our transactions in financial inclusion accounts were around 25 crore. And now there are more than 16 crore transactions in the first six months (of FY 2013-14) alone, which means we may end up with around 35-36 crore transactions during this year. So from 25 crore transactions to 35 crore, there definitely is improvement. But this is not enough. There might be a requirement for 200 crore transactions or more. So I would like to reiterate that there is more to be done.

Is the direct benefit transfer (DBT) scheme helping push up transactions?

The DBT scheme has not been functioning effectively. It cannot function in isolation without the willingness of the state governments to implement it. For example, there is a lot of dispute regarding Aadhaar and recently there was a rollback on the LPG subsidy being directly transferred to bank accounts. I believe the entire society’s outlook needs to undergo a change. We must understand that when state benefits are transferred through bank accounts, there will be transparency and automatically all the accounts will become active.

However, we must remember that it is because of these leakages that a lot of people are earning their livelihood. These people are an important segment of society and hence they need to be integrated in the system and provided alternative employment. Unless we are able to eliminate the conflict-of-interest situations and create an appropriate ecosystem where all stakeholders are incentivised and committed to ensure smooth implementation of DBT, it will continue to be sabotaged.    

A year ago, you told us that financial inclusion needs to move on from being fashion to a passion. Has that happened?

One needs to understand that when I say financial inclusion has become a fashion I don’t mean it in a negative sense. What I mean is many people are talking about it, which in itself is a positive development; but it has still not become a passion for most of them. As I said earlier, almost 80 percent work is still left to be done. One thing I can confidently say is that the moment financial inclusion becomes a national passion we will achieve complete financial inclusion within six months!

Banks recently submitted their financial inclusion plans for 2013-16. What was your feedback on their past performance? And what are the new focus areas?

If we look at targets, banks have achieved almost 60 percent of them. Now, there is also greater focus on urban financial inclusion. So what is happening is that the process has started and the direction is there. The two important things for financial inclusion are access to banking service and the use of these services. In terms of access, we have done a lot of good work but the use of banking services has not been satisfactory as yet. So that will be our focus.

Another crucial aspect will be to increase the credit flow, which includes both emergency/consumption credit and entrepreneurship credit. I am quite sure that certain steps that we have taken – especially by redefining the general credit card (GCC) scheme, by assuring people of foolproof banking services and by ensuring greater penetration of bank branches – we will be able to make significant strides. By the end of this plan period, our target is to link every household with a bank.    

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The biggest problem with the business correspondent (BC) model is retaining the BCs. In order to overcome this some banks are leveraging the existing common services centre (CSC) network to provide banking services. Is that a good alternative? Have you suggested more such alternatives?

Banks are free to use whichever model suits their need and business plan (best). As for addressing the high attrition rate of BCs owing to uncertainty of earnings, banks may have to make this activity more remunerative. This may call for a relook at their HR policy, including creating a separate cadre which is willing to work in rural areas at a lower salary and inducting BCs as permanent employees.

In India, there is no shortage of human resources and they are all looking for employment opportunities. If BCs can be assured of a stable source of livelihood, the attrition rate will automatically come down. Today, as the daily wages have gone up, thanks to MNREGA, villagers do not want to leave their villages and migrate to urban areas for work. With that logic, if banks are able to assure the BC agents of enough sustainable income closer to their homes, provided they generate transactions in BC accounts, I don’t see why that model should fail at all. As far as alternative models are concerned, we have given banks all the liberty. This is a cafeteria approach, and it is for them to choose whatever suits them.

Won’t putting BC agents on the payrolls add to the cost burden for banks which are not doing too well financially?

I don’t think so. I believe that if we have strong labour laws in place, then permanent or temporary employment does not make a difference. We need certain reforms so that there is no exploitation. Like minimum wages under MNREGA, maybe there should also be some minimum wages for BCs so that even if they are roped in on a temporary basis, they are not paid below a fixed level.

The problem is that permanent people (the staff on the payroll) are being paid too high compared to the work they do. It is happening in the organised sector, and especially in the public sector.

In the present scenario where a mounting pile of bad loans is the biggest worry for banks, is it not risky to involve BCs in providing credit facilities to customers?

When we say BCs must be encouraged to provide credit to customers we don’t mean they should sanction loans. That will continue to be done by the branch staff. (But) BCs must be engaged to spread awareness about the availability of credit facilities and to help banks in timely recovery of these loans by constantly following up with the customers. In fact, they could also help banks in assessing the repaying capacity of a customer before the loan is sanctioned using their first-hand knowledge of the village.

FMCG companies moved to rural markets because they knew the urban markets had saturated. Why do banks need to be told to tap rural markets?

It is simply because there is not enough competition in the banking sector. If they are able to make enough money by staying in the urban markets it doesn’t make sense for them to go to the rural areas and put in that extra effort. The only way through which complete financial inclusion can be achieved is by enhancing competition in the sector as there is a strong possibility that new players will bring in new ideas and innovations that will encourage older players to catch up, thus accelerating the process.

By that logic, will the new bank licences boost financial inclusion?

Absolutely. Licences should be given to all those who fulfil the ‘fit and proper’ criteria, and this shouldn’t be a one-off event but done on a tap basis. It is only with more and more players in the field that the consumer will benefit as banking penetration will get deeper.

But the popular perception is that the agenda of financial inclusion is mostly being driven by public sector banks and private players don’t take it as seriously.

As long as there is business, every bank, whether public or private, will do it. In fact, it is my belief that private banks will do more in financial inclusion because they consider this a viable business and the public sector banks will have to play catch up. This is because PSBs are government-owned and thus have lesser flexibility. They have less incentive to innovate and experiment compared to what the private banks can. Most of the innovative things in banking – like ATMs, retail banking, and consumer financing – have been done by private banks, not the PSBs. In fact, even foreign banks should be allowed as all these players have a better DNA to bring about innovation and better products in this area.

Your target is to provide banking access to every household by 2016. On the other hand, the Dr Nachiket Mor panel has recommended that every adult must have a bank account by then. How realistic is that target?

I don’t have a problem with the panel’s target. I have never said it is impossible to provide bank accounts to every individual by 2016. All I am saying is that by 2016, at least every household should have access to banking services. This is the minimum target I am setting. So there is no contradiction there. Obviously, I will not have any problem if we are able to achieve the panel’s target, provided banks are able to do that. In fact, the panel should have undertaken a holistic examination of what is to be done to achieve that target and should have made appropriate suggestions.

What about mobile banking in India? Why can’t India become the new Africa given deep mobile reach in the country?

We have allowed mobile banking. One must understand that there are two important entities for mobile banking: the telecom companies and banks. The problem is that in our country the mobile companies want to become banks. While having that ambition is perfectly fine with me, I don’t agree with their reasoning. They claim that banking licences should be given to them just because they are telecom companies. That is not right. A banking licence can be given only after the due process and if they fulfil the ‘fit and proper’ criteria.

Also, there is a turf war between the telcos and banks with respect to owning the customers, revenue sharing, etc and that is foolishness. I believe that once they start the business, the revenue model will automatically evolve. However, that’s a business decision and RBI cannot interfere. All I can say is that as far as the banking regulator is concerned, there is no guideline which is hindering mobile banking.

MFIs have given banks some serious competition in rural areas. Do you think there is scope to convert this rivalry into collaboration so that the two entities become complementary?

MFIs have been hugely successful because banking penetration is very low in our country and they will continue to blossom as long as the penetration remains low. They have played a very critical role in bringing the people, in the clutches of moneylenders, to some sort of a formal financial system. However, as and when banking penetration improves, MFIs will have to seriously take a relook at their business model. This is because they will not be able to scale up their operations. They will have to work in a very restricted area or will ultimately have to become BCs for banks. So, in the longer term, there are only two options for MFIs: either to become BCs or to become banks.

(This interview first appeared in the magazine's March 16-31, 2014 print edition)