#dnaEdit: A welcome initiative

The Reserve Bank of India’s latest guidelines on the licensing of small and payment banks is yet another effort to extend banking services, particularly in the rural areas. Since the nationalisation of banks, government had initiated a series of measures to this end. The entire approach until now had been from the point of view of credit delivery. The nationalised commercial banks were asked to extend coverage in rural unbanked areas.

Commercial banks proliferated but the need for coverage proved to be far in excess of what these banks could do. There were structural limitations as well. Public sector commercial bank branches had proved to be a costly way of extending banking services, and somewhat inflexible in meeting the requirements of people in rural and remote areas.

Subsequently, a new concept was tried, that of regional rural bank (RRB). These were in effect, low-cost branches of scheduled banks through their RRB subsidiaries. However, because the RRBs were owned by public sector banks, issues of pay parity in RRBs and the promoter banks clouded their operations. Additionally, the government had tried to bolster the cooperative banks to provide banking services in unbanked areas and particularly for those homes the public sector banks could not reach. Remember, that these moves were made in the context of implementing the 20-point programmes, formulated initially during the first government of Indira Gandhi. 

The multi-agency approach to mass banking in the rural areas had some limited success. But it also created problems of its own. For example, a borrower would often mortgage the same asset for obtaining loans from multiple agencies. As a result, when a borrowing account would go bad, no one had any clear idea about the asset or collateral rights on which the loans were granted. Multi-agency approach created a confused credit delivery structure, which was sought to be corrected through a number of measures. Until now, the conundrum of multi-agency approach has not really been resolved. 

The introduction of small and payment banks has to be seen against the prevailing structure of credit delivery mechanism in the unbanked rural areas. RBI has cleverly approached banking in the unbanked areas, marking a different strategy from its previous one. While, the earlier approach revolved around the concept of credit delivery, the new banks are supposed to steer clear of this. They are not allowed to lend; they can just about accept deposit and invest in government securities and other instruments. So, hopefully, these will be a different crop of banking intermediaries from PSBs, RRBs and cooperative banks. 

They are also to be judged from the overall macro-economic perspective. By accepting deposits, these payment banks are supposed to mop up savings with the households in the unbanked areas. In the absence of financial intermediaries, households — literally — put their savings either under the mattress, or in dud investments like buying gold. These have had adverse macro-economic impact. Savings rate has gone down from 37% to just about 30%. Finance minister has only recently urged the need for raising this. Payment banks might prove handy in achieving this objective. If they are able to offer attractive deposit schemes, the key objectives of payment banks — providing payment facilities, particularly remittances, across the country — will soothe the changing economic profile of the migrant worker. At any rate, this is a good concept which deserves a full run.