SS Mundra took charge as the RBI deputy governor on July 31 last year. Previously, he was chairman and managing director of the second largest bank, Bank of Baroda, where he had started out in 1977 as a probationary officer. At the central bank, he looks after banking supervision, currency management, financial stability, rural credit and customer service. In an interview with Sweta Ranjan, Mundra gives the central bank’s perspective on financial inclusion.

Under the PMJDY, crores of accounts have been opened but transaction remains an issue.

Like any initiative of this kind, there will be two sides to it; the supply side and the demand side. Banks took up the task in mission mode. That took care of the supply side. Now, for the accounts to remain active the demand side has to get activated. There are three essential elements to it. One is financial literacy. Banks can open accounts but how will people on their own understand the advantage of having a bank account and use it? To give initial momentum, direct benefit transfer (DBT) will play an important role. If DBT starts flowing in, there will be money in the account and then obviously it would be followed by transactions. That is the second part. The third part is that people should be engaged in a gainful economic activity. Only then, they will generate revenue, there will be saving and there will be investment. This is the full cycle.

Can financial inclusion be the responsibility of banks alone?

Account opening was a crucial but relatively easier task. Now, to keep these accounts activated and taking care of all other areas for bringing in financial literacy, motivating people, DBT needs to grow. It would need the involvement of many more constituents than banks. Banks will continue to play a pivotal role but will require the coordination of a large number of other agencies. Banks have done the supply side, now they cannot create demand and that is why the three crucial elements are needed.

Will DBT work as a catalyst?

At this point only one benefit has started flowing in and that is the cooking gas subsidy. I think it is translating into transaction. Earlier, when RBI was progressively covering villages and the DBT was on the agenda, 29 DBT schemes were identified, out of which 23 were from various state governments and six from the centre. Now all those DBT schemes should start flowing into the accounts.

The second most important requirement would be Aadhaar. Accounts are opened in large numbers but it would not be correct to say that all are Aadhaar-linked. The next requirement is to seed the Aadhar numbers [into all accounts]. Only then the benefits can start flowing in. I come back to the point I mentioned: it will need the involvement of many more agencies than banks alone. In this case, the Unique Identification Authority of India, the state governments and the central government have to be very much in the picture. The state governments will have to ensure the benefits start flowing into the accounts.

A World Bank report says that the bank account penetration in India has increased from 35 percent in 2011 to 53 percent in 2015, but 72 percent of these accounts show zero balance. How do you look at the phenomenon?

The data which has come from PMJDY reflects that almost 99.9 percent of the households are covered. There are two aspects. One is each household is covered, which means that at least one person in each household has a bank account. Second, each individual who is eligible to open a bank account should have a bank account. So probably it is not that each eligible individual has a bank account – maybe we are still at a distance from their requirement. But as per the PMJDY data each household has an account, and that is sufficient to start transacting.

Census 2011 shows India had around 25.5 crore households and before the PMJDY started more than half of them were not included in the banking system. Within eight months of PMJDY almost 13.1 crore accounts have been added. To incentivise it, zero balance was allowed, so a large number of accounts were opened with zero balance. That is why it is but natural that only 30 percent of those accounts have some balance. In the last estimate, which the PM has also quoted, these accounts put together have around Rs 14,000 crore in balance. Now the remaining 70 percent is the challenge. For these accounts to remain operative it is important that the business correspondent (BC) network should be strong. Under the financial inclusion plan which the RBI had rolled out in 2005, the first phase was that by 2013 all the villages having population above 2,000 should be covered by the banking facility like a BC or a branch – not necessarily in the village, even in a nearby village. In the second phase, villages with a population below 2,000 were to be covered by March 2016. This target was slightly pre-poned to match PMJDY which put the deadline as August 2015, which is yet to come.

When I was reviewing some data recently, I found that by the end of December 2014 the originally planned target for March 2015 for covering the villages was met around 89 percent. Now if you put these two facts together: if the accounts opened cover
99.9 percent of the households, but the villages covered are around 89 percent of the March 2015 target (it could be approximately 70 percent of the final target), what does it mean? It means that a large number of accounts have been opened in the branches and they are still not supported by the BC network. If that is the case it can lead to overcrowding in the branches. Also, will a single branch be able to serve such a large number of constituents?

Thus we need to ensure the BC network is expanded. Suppose someone has opened an account in a branch 20 km away from his village. The account will never be operated because we are back to square one. So he should have a BC outlet nearby. So, step one: there should be adequate BC outlets, step two: check if existing outlets are active, check if BCs are available, their equipment is functioning, they have connectivity. These things need to be monitored and then comes the question of financial literacy and DBT.

RBI is processing about 100 applications for small finance banks and payments banks. Will this help in  financial inclusion?

It will, but we are still in the process of scrutiny. Once it is over, those found eligible will be given the letter of intent. Then they have to prepare their business plan and once RBI is satisfied that the business plan is robust enough then they will be granted the licence. Then they will start operating. It would be naïve to believe that someone new to this sector would be all over the country from day one. It would be an incremental progress. It is a larger vision; eventually they will become important players in the financial system. But they are not going to be a major factor in the task on hand immediately – they will become so eventually.

Why have only a few regional rural banks (RRBs) been able to survive?

RRBs, from what they were a few years back to what they are today, have improved a lot in financial strength. Two years back there was consolidation, in which small RRBs were merged into larger entities. After that there are 56 RRBs in the country, and only one is loss-making today. I agree partially with your observation, in the sense that RRBs today are completely different from the concept of what RRBs should have been. In a sense they have become a clone of a commercial bank. But otherwise they are doing reasonably well. Most of them are profit-making, they all are technologically better enabled, and they are on core banking solution.

Do banks see PMJDY primarily as an obligation rather than as an opportunity or social responsibility?

It is a very difficult question because to reply to that I have to enter into the mind of every individual banker. A bank is not like a single individual; it comprises a number of individuals and a number of outlets. Even within one bank, there would be people who are convinced it is a great opportunity and also some who would be taking this as an obligation. Even if we take the philosophy of a bank as a whole, my sense is, it is a mixed bag. There are banks that have understood that it is a great business opportunity and there are entities which are doing this more as an obligation.

Can financial inclusion become a viable business model?

It can certainly be a very important and viable business model, provided a few requisites are met. One, financial inclusion has to be supported by a strong technological base. Only then you can do low-cost delivery. There are a large number of small accounts and maintaining each has a cost; it is not free. This can become counterproductive if it is not supported by a very strong technology. Then the BC network should not only be completed, it should be robust too. There should also be enough incentive for the BC to continue to remain involved, otherwise it will not translate into transactions. Then the account should remain active with transactions. If all these things are in place, it is certainly a viable business model.

Don’t you think simplifying KYC norms for PMJDY can create problems for bankers?

The RBI has announced that initially the accounts which are very small with minimum transactions can be opened with minimum KYC requirement. If the account becomes bigger and tends to have more transactions, then eventually banks will have to gradually upgrade the KYC requirements of these accounts. Banks should be able to upgrade. That is why I said a smart technology is needed for these matters. You cannot manually monitor if an account is crossing the threshold, but with technology it is possible to put in all those checks and balances. You keep on upgrading the account from the viewpoint of KYC as and when it is needed. If [the norms are] properly followed by the bank, I don’t think it poses any problem.

Do you think that too much stress on financial inclusion can lead to financial instability?

Not instability. Financial inclusion is very important for not only financial stability, but also political stability. In any society if a large number of people are excluded it is not only an economic problem, it is very much a social and political problem. So, I won’t say that too much of financial inclusion would result in financial instability. It is needed for stability. But, yes, what it can lead to if opening accounts is the end in itself, if only banks are expected to do all the activities around it, and a large number of other players don’t come into play and provide the support system, then it can contribute to some extent to bringing instability in the banking system. Banks have many other core activities to do and if their entire resources are focused on this, then other activities – originating the credit, the follow-up, the recovery, other customer services – can suffer. Ultimately, the resources for each institution are not infinite and you have to deploy them for various activities. The mission mode phase was important and banks have done splendidly but they cannot remain fully engaged in only this activity. Related agencies have to come into the picture.

Bankers have asked for a credit guarantee fund as they fear that the overdraft facility in PMJDY might further accentuate the problem of NPAs. Do you think the concern is legitimate?

The RBI view is clear: this cushion or support of a credit guarantee fund is not really a very welcome idea. What is more important is to do due diligence, and give credit to a person because he or she deserves it, not because there is a credit guarantee available. Credit guarantee dilutes underwriting standards and brings – it’s a harsh word but – a little bit of irresponsibility on both sides, the lender as well as the borrower.

The finance minister has said that the overdraft of '5,000 under PMJDY can be used as microfinance. What is your opinion on this?

This is very good. As it is, there are schemes and institutions to provide credit to small borrowers. If someone is found eligible for an overdraft of '5,000 and the amount is used only for consumption, it will become a one-time transaction. If that credit is used for productive purposes, that is what microfinance is. For example, in a village, a woman weaves bamboo baskets and sells. This kind of an activity requires very small capital but they don’t have even that much capital available. There are places from where they borrow in the morning, purchase the required raw material for the day, weave baskets, sell them and repay in the evening with interest. We feel Rs 5,000 is a very small amount and still it can make a difference in a large numbers of such activities. This woman in our example won’t need even Rs 5,000, and she can sell baskets when the price is right – not the same day to pay back in the evening. I think that is what the finance minister meant by microfinance.

RBI has said that overdraft under PMJDY should be treated as priority sector lending. However, at the PM’s retreat with bankers there were talks and suggestions to tweak priority sector lending. Don’t you think the new directive will add to the bankers’ problems?

These are two very different things. Number one, the whole review of the priority sector: now that is entirely different. People are already working on this. RBI appointed an internal working group. It has given its recommendations, which have been put up for public comment. We will soon issue the new priority sector guidelines. Priority sector guidelines need revision from time to time because the landscape is changing. This is not the first time; there have been several committees and there have been revisions. That is one part of it. This is essentially microfinance. Even in microfinance, there is always an element of consumption credit and an element of productive credit. That is treated as priority sector lending. It is the same thing, so RBI need not devise any new rule for this. It is only a clarification.

Banks have been implementing PMJDY in mission mode for quite some time. How do you rate their success? What are the impediments in the way?

As for giving a fillip and taking the first step, I would say it has been an outstanding success. From all the parameters I have already mentioned, their success is outstanding. I won’t talk about ‘impediments’, because they become impediments when you are unable to solve them for long. It is too early to say that. As for challenges, there is financial literacy, then the BC network has to remain active and become viable. Now the demand side should get activated, DBT should start flowing and growing, people should start depositing their surpluses.

sweta@governancenow.com

(The interview appears in the June 1-15, 2015 issue)