Wholesale banking is loss-making: Kamalesh Chakrabarty

The Reserve Bank of India (RBI) has been pushing for financial inclusion for many years. But it is only this year, its 75th, that ‘financial inclusion’ has gone beyond a friendly nudge.

The entire top management of RBI is virtually dragging banks to hinterland. Top RBI officials have travelled to countryside to understand the need for and, subsequently, demand services from banks.

In fact, the RBI, this time through a policy action, is looking to shake up the existing players into spreading their reach in the country with a not-so-subtle warning that if they don’t measure up, it will throw open the space for more banking players in the country. Governor Duvvuri Subbarao is just the man to push through this agenda, which he calls a “major endeavour” before the RBI today, very forcefully.

Deputy governor Kamalesh Chandra Chakrabarty has chided bank officials at public interactions for not heeding to peoples’ concerns and has, in an interview, challenged anyone to prove that financial inclusion is unviable.

“You will be wiped out,” Chakrabarty warned banks that show inertia in spreading their reach by technology-enabled financial inclusion.

The deputy governor, or KC, as he is referred to in the media as well as in RBI administration, says “financial inclusion is (now) a compulsion.” He suggests the rush for cross-border deals will be in vain as wholesale banking is going to be loss making. “It will become more loss making and that’s why you have to go to more and more retail, (and) small ticket,” he said.

Chakrabarty had famously said it wasn’t the time for Indian banks to consolidate, but to engage in financial inclusion.

He still maintains that stand.

Chakrabarty was combative in his over one-hour interaction at the central bank’s Amar Building office in Mumbai. Excerpts:

We’ve been talking to some bankers, the sense seems to be that banks are not too enthused on this drive of financial inclusion. They keep citing cost issues.
What do you want to say ... banks are not interested?? I have not seen a single bank chairman who has said ‘we are not interested’. We don’t believe that.

They won’t say that to you…
Look, let us be clear. Do we believe that we need inclusive growth?  Is there anybody who says it is not necessary? Nobody will say that. Then second corollary is, if we want inclusive growth, then it cannot   happen without financial inclusion. So, the matter is over. If you want inclusive growth, financial inclusion is a must.

Then you have to say what is your objection. What are the difficulties? Difficulties are many. People are poor. You say that poverty is there for the last 5,000 years, it is very difficult to remove  poverty. That doesn’t mean anybody is saying poverty should not be removed. So, financial inclusion is compulsive.

Even in G-20, governments are discussing financial inclusion. So,
there is no doubt in that. Now, let us say what are the problems of the banks. What problems are they talking?

Basically, it is the cost...
Any commerce for the poor is always viable... more viable than others. Is cost of borrowing money from a bank cheaper or from the moneylender?

Bank is obviously cheaper...
Then, the cost cannot be the consideration. You must understand, commerce for the poor is always more viable, more profitable than commerce for the rich. If you go to purchase 500 gm of potato, and if someone else goes to purchase five kg, who will get it at a cheaper rate? You can make a pack of 500 gm or 200 gm of potato and sell it. If you have the ability to do that, you will be earning more.

This is what banks have not understood. And, let anybody come in front of me, and discuss with me, have an open public debate. The cost of one bottle of safe drinking water is more in sub-Saharan Africa than in the city of London. Why, you must understand because if the poor does not pay, he will not get the same product, because the rich will not allow it to reach the poor cheaper. And the cost...you recover the cost. We are not saying you subsidise the poor. The only problem is the transactions are small.... Unless you have appropriate and suitable technology, it is not possible to do it. That I agree. That is why we are asking banks do it as a business model by using technology. And...that is the importance of IT-based financial inclusion.

The emphasis is on the technology aspect... is that the point?
Before 500 years, who were wearing clothes?

Not many, but the rich...
Why? Before 150 years, there was a scientific innovation...cotton weaving and processing machine. And that led to...textile technology. And that is why today everybody is wearing clothes. You have never said how technology goes to them? Technology need not travel to everybody, it is the product and the service that go to everybody. The problem is you don’t understand technology. What I say is, product and service will reach everywhere. Technology will remain in the bank’s headquarter. And that technology is available today.

The hand-held devices...
Mobile, all are available to them, internet, everything is available to them. TV has not gone to all the villages? We have never questioned. Telephone has not, mobile has not gone to all villages? Problem is you yourself are doubtful then how will you interview the bank.

The bank will give you something and you come and talk to me.
The question seems to be scale, number of villages... some 600,000 habitations that RBI has identified...
You mean to say 600,000 villages don’t require medical facilities? I am only saying that this is where there is more volume... there is more business. If per unit you earn more, then more the members means you will make more money. Banks are a commercial entity. I have never seen somebody saying ‘so many people visit a restaurant and I have to give food to so many people, it is very difficult’. More customers come, the restaurateur is more happy.

For the first time I am seeing commercial institutions (banks)...saying more customers means I am unhappy. I am saying you don’t do it at a loss, you do it at a margin. And that margin is because of technology, otherwise it is not viable.

Technology makes it possible to produce goods and services, at a cost which is affordable to the poor. You see, basically we have to change our mindset. Only thing, banking technology is only two years old. Even all branches are not under CBS (core banking solutions). Now, CBS technology, hand-held, mobile, delivery channel integration, those are the challenges. And, those need to be done. Unless we do that, we will not be able to meet financial inclusion.

The primary challenge seems to be more technological...
Technology is not a challenge, financial innovation has already happened. It is adopting these, changing the mindsets and doing it as a commerce in a viable and sustained manner. And for that, we require a delivery model and business model. And this is precisely what we have asked the banks: create a plan, think on that, how are you going to do that. And let’s start doing that.

You’ve given a deadline of March 31...
That is for giving the plan, the implementation will be three years.

Is this like every bank has its own model? Will some uniform directives be given?
See, let them first do their own. Then something will emerge. Ultimately hand-held will remain, mobile will remain, bank will remain, product will remain, deposit, credit, remittance of money. So, I don’t see any difference in that.

Given all this, the problem again seems to be..
But no bank has come to me with a problem. Bring two bankers here to me... Look! All this does not happen because the rich have no compassion for the poor. Bank people who are working, they are drawing salary without working. And that’s why these people are talking like that.

Some people in Palwal in Haryana (where the RBI held an outreach programme), some locals had interacted with deputy governor Subir Gokarn and told him they are not entertained in the bank branches there...
 This is another problem. Banks are a commercial entity, you agree? He has opened a branch... for what purpose? For doing the business for the customer. He has a cost. Now what you are saying is he’s not doing business. Somebody has opened a restaurant, what you are telling me is that Sir, people are coming inside, they are not giving food because we are allowing such people to draw salary without working. And we allow that thing to happen, you media don’t write. You don’t write banks are not doing that. That’s what you are doing. You (media) only write about monetary policy.

Banks complain they are not adequately provisioned against risks.
What is the risk?

Bad debts.
You first show me what is the bad debt. Without giving money you are saying it has become NPA. First you give. You see this is what I am again saying. Banking for the poor is always more viable. The history of human civilisation has demonstrated this. People have become rich in the society by lending money to the poor.

Why so much emphasis on financial inclusion?
It has become a compulsion now.

Due to this compulsion, are banks feeling the pressure, which is what...
That is what I am saying. When it has become compulsion, do it as a part of the commerce, part of a profitable, viable business.
Banks that will not do that will lose out. When technology comes, people who are backward, they will all disappear. I have 31 years of work done in a commercial bank and I have always found poor more viable, provided I have the ability to deliver the product at his doorstep as per his affordability.

That is access, what about the risk?
First you take the deposit, there is no risk. First, you open an account. If you open account, if you can link your entire state benefits will be passed on through these accounts. That itself is a business. If the borrower can do business by borrowing from a money lender at 15% (banks can capture that). Microfinance institutions charge very high rates. What is their recovery?

You are expecting appointment of business correspondents will do the job...
You appoint business correspondents, in fact, that is the most important reform the RBI has brought. No?
 
Banks seem to feel that they are being hastened into the process, pushed.
What is the push?

You have given a deadline of March 31
If we don’t give the deadline, society will give the deadline or society will disintegrate. What is our deadline, you tell me? I am saying, what will you (bank) do, give me a plan. Now that is also deadline? You say, you will do it in 20 villages, I am not disagreeing. I am saying let your board approve financial inclusion plan. That also has become a deadline? Huh?

In some sense, given the overbearing of recent initiatives, that seems to be one of the...
No, no!!! What is the overbearing? We are only saying you say what you can do, you give a plan. That is also a problem?

Will you accept what the banks give?
What I am again telling you is, see, look, board-approved plan means what? Have I said I will not accept that?

No, you haven’t said that.
Then? But banks are saying they are being pushed into... But, I am again telling you, these are all your (media) creation.

No bank has told us. In fact, any meeting, anywhere we have...we ask... Do you believe..? They say we believe in that.

What will they say? You are the regulator.
No, no. What is the regulator? I am saying so many things they are not doing. Let somebody say that ‘this is the thing’... then that is okay. If you are not ready to say that then you have to abide na! Then, matter is over.

There are so many banks, they will all come with their business models.
Some will be aggressive, some will not be aggressive. How will you reconcile? The problem is with your mindset. First thing what you say, the mindset of the rich.

Us? Rich?
What I am again saying, please understand. Bluntly I am saying. When I say this is a viable business, banks must perceive this as viable. It is a profitable business. Then, I am not able to understand, if I have an ability, if I am a commercial entity, why I will not do the business. Now, in that game, those who are inefficient, those who are not able to do this business, they will lose out. I have no problem as a regulator. Other banks will go ahead. Which (bank) does not want to mobilise deposit? Okay, he will lose out. He will lose out market share, he will become unviable.

So in a sense, there will be some competitive spirit in this financial inclusion drive?
Banks, which move ahead, which go ahead, they will be a winner. And, you will see, it is not only state-owned banks, even private sector banks will enter into this area. And that’s why I have not asked those banks to provide the banking facilities to 100,000 villages. Has RBI compelled? Is Mr chairman of SBI complaining that he has been forced? They have towed on their own way, no? Is it not them not writing ‘we want to be banker to every Indian’? Because they perceive it as a business opportunity.

So is this reluctance completely uncalled for?
I don’t see. Where is the reluctance? I have given you examples...and you are saying reluctance.

Foreign banks...?
No, foreign banks are not in the picture. These are all domestic banks. In fact, we have not even written to foreign banks.

Will you?
That is a different issue. We don’t think at present, they are meant for this. But, if still they want to bring the technology, they are ready to do, they have the freedom to do that.

Given the way the regulator has gone into financial inclusion... any comparable parallels?
You see, here my dear, banks were urban oriented, they were only lending to the commercial industry, big people. It is out of regulation only they have followed to other areas. What is the parallel? Everywhere. Banks cannot be disassociated with the developmental goals of the nation anywhere in the world. Industrial revolution would not have happened in the industrialised countries, but for the banks funding for them. Any country who has to bring development, they have to take help of banks. In any society they have to take help of the financial sector for their economic growth and prosperity. They have to take help of the financial intermediaries. It is a universal truth.

How will the RBI regulate the financial inclusion activities?
I am regulating the banking business. I am not regulating financial inclusion. Financial inclusion is for taking deposit, for lending money or for remitting money. All three I am regulating even otherwise. How I am regulating, the same way I will
be regulating.

See again... conceptually you are not clear. Financial inclusion... I am not regulating. I am just regulating banking service.

You have asked for business models. They will submit to you, how will you measure..?
Go and ask them, ask the bank. You see you are opening the account, acquiring the customer, providing them the service then what is that you want to tell me that I don’t understand the business? If you don’t understand banking business, that is not my fault.

You see, here what is happening in the financial inclusion — instead of customer coming to branch, bank branch goes to the customer’s house. This is what the delivery model is. But, the business remains the same.

What are the pointers from the central bank to these bankers?
Same regulation applies!

Which is to go to these unbanked areas and deploy as many branches. Is that it?
See, what we are saying you must increase your reach and coverage. That is only we are saying. Why you need to do it? For inclusive growth of the society and nation. And you need to do it for your own survival. Banks as a commercial entity have a vested interest in the growth and prosperity of the society. When the society becomes more prosperous, when people living in the society become more prosperous, they give more business to banks. That is the only thing I am trying to tell the bank. Beyond this, there is no regulatory perspective.

But in this business, banks which will show little bit more enthusiasm, they will get more regulatory forbearance. Those who will not do that, that we will consider at a later stage. But this issue does not come, I have not seen a single bank who says we don’t believe in that. My problem is, you are bringing to me, my focus, some imaginary issues. Okay? Then show me the interview of some bank and print it in the name of the bank.

I have met somebody...
He may be a doubting Thomas. I don’t say there are no ‘doubting Thomases’ in the banking system.

He was sir. He was worried...
So, why don’t you bring him here?

But you yourself have said sir there are problems. There are challenges... Technology is one aspect of it.
My first challenge is... First believe in the concept na. The first thing you are not ready to believe.

What do you say to the doubting Thomases? what is your message?
You will be wiped out! Though this a viable, profitable business, you need to know how to do this business and how to expand. Those who will not do that, will be wiped out. They will not remain, they will be losers. That’s the only thing I want to say. And why as a regulator am insisting? I want all these banks to survive. All banks that are there need to survive. And if they don’t do this business, they will not survive. The survival is at stake.
NW18