Direct transfer key step for financial inclusion: Takru

Rajiv Takru, secretary, Financial Services, Government of India, says the problem of non-availability of large population of the country will be combated by the RBI's move to provide fresh banking licences.

In an interview to CNBC-TV18, he adds that the biggest step in direction of achieving financial inclusion is through direct benefit transfers.

“In it where as part of concerted drive, identified beneficiaries are being picked up, the bank accounts are being opened and financial inclusion is being ensured by letting money move into those bank accounts and letting those people excess the bank accounts," he adds.

Below is the edited transcript of Takru’s interview to CNBC-TV18.

Q: Where do you think the failure lies that despite so many efforts by the government as well as the banking system we are still at a dismally lower level of financial inclusion?

A: The sheer availability of a bank to the population is less than required. So, that’s one reason why people have less bank account. This has been addressed. The new bank licences, which are going to be granted, are also a step in this direction. Financial services are also provided by even a non-bank facility like automated teller machines (ATMs), for instance, banking correspondents is another example. These are also being emphasised. So, a large number of ATMs are being installed. Banking correspondents are going to number in lakhs and that process is on.

The biggest step towards financial inclusion is going to be the direct benefit transfer scheme, which has been implemented now. In it where as part of concerted drive, identified beneficiaries are being picked up, the bank accounts are being opened and financial inclusion is being ensured by letting money move into those bank accounts and letting those people excess the bank accounts.

Thereby getting familiar with the banking system as a whole and this by itself does not ensure financial inclusion; financial inclusion has to be seen as a much broader concept, and this would mean not only drawing government benefits out of the bank and putting in your small savings, which is important but in addition to that getting access to credit, which your familiarity with the banking system will make much easier for you, getting away from the grip of traditional moneylenders, fly-by-night operators and so on who are operating at present.

Q: Where then do these small MFIs stand a chance to get a banking license and for this purpose the Raghuram Rajan Committee had recommended different levels of capital requirements for different stakeholders, do you think not having given those different capital requirements has been a missed opportunity?

A: There are two ways of looking at life. You can either look at the opportunities you have got or you can keep crying over spilt milk. I would say that the new guidelines and effort to allot new banking licences which is ongoing is a positive development. We have a capital limit, which is a benchmark. If somebody doesn’t meet that benchmark, I do not think he has got any business to open a bank. Even wanting to open a bank because there as to be certain amount of solidity in the system.

Q: But there can be banks that cater to different segments?

A: Ultimately, the problems here are problems of much large dimensions than looking after interest over particular company. I think the country’s problems have to be taken in the proper perspective. We have different categories of banks; there are co-operative banks, district co-operative banks, Regional Rural Banks (RRBs), all kinds of institutions which are operating. Nothing prevents non banking financial companies (NBFCs) from becoming a deposit taking NBFC and getting itself registered with the Reserve Bank of India (RBI).

I agree with the contention that people who want to take deposits are being prevented and it’s only if they can get a banking license that they will be able to operate. It’s not that way at all. These people are all there and a NBFC can take deposit provided get themselves registered, there are very few of them who are registered with the RBI so that is not an issue. I think the present guidelines are more than enough for the moment to give us a fairly large number of decent applications.

Q: Let us talk about the role of the banking system. There was priority sector lending norms for a while now and banks have been making efforts in terms of banking correspondence etc to promote financial inclusion, yet the bigger concern is that a lot of banks are meeting PSL norms just by buying securitized portfolios and the accounts that are being opened, no frills accounts are actually lying dormant - so you have the numbers but in spirit financial inclusion is not been promoted?

A: I don’t think that the banks have been doing very badly in priority sector lending. There is always scope for doing more. As a matter of fact, I would like if it is more than 40 percent which is good. They are moving in the right direction, they are very close, most of them – to 40 percent and the performance is not bad at all.

The no frills accounts which are being opened are largely in connection with the direct benefit transfer and now, with the LPG subsidy coming into direct benefit transfer, it is not a subsidy in that sense. It is not meant for those categories of people but for meant for anybody who has LPG connection. There are some 14 crore people in this country according to the ministry of petroleum and natural gas who have LPG connection.

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So, with those people coming in and out of those 28 different schemes being implemented under the direct benefit transfer, very large number of accounts are being opened now. When it comes to saying that no transactions are taking place that could be merely because the system of flow of subsidy to those accounts has not started because the department concerned hasn’t started the flow so far.

However, I can say that in these 121 districts it is more than 32-33 lakh beneficiaries who are involved in the direct benefit transfer. Banks have a list of about 30 lakhs and the banks have already opened bank accounts for 60-70 percent of them, they had as per the last report we had. If within the next month or two, most of these departments would start moving their subsidy through the Aadhar payment bridge and normal payment bridge, the problem will automatically be taken care of. Once the money flow starts through the bank account and the person starts accessing his or her money from the bank, the question of having no frills account without any transaction there will not arise.

Q: At this point in time the quantum of subsidies that are going to be distributed via the direct benefit transfer (DBT) is only about three-four percent of the total subsidies. So, there is no scalability. By when do you see the scalability, which will mean that these accounts will become active and the impact will be large scale?

A: There are again two questions here. When is this going to become a little larger in its scope? Now I can answer it only for the domain with which I deal that as far as the banking and financial institutions are concerned I can say that they are now reasonably well geared up to dealing with the system the way it is set up and initial teething problems have been sorted out, banking correspondents appointments are taking place, orders for handheld ATMs are in progress, they are coming and generally the banks are on track. Now it is for the individual departments to decide when they would like to enter into this and we would go a step further. We would say that many state governments have already shown interest and as a matter of fact a lot of state governments are also adopting the benefit - this DBT route.

 They are also operating directly to beneficiary accounts. So, I suspect that this is likely to pick up very soon and given the scale of the whole thing may take a little time. It may take a few months. But the rate at which it is going, for instance just to give you an example in liquefied petroleum gas (LPG) subsidy and you know LPG subsidy has just started and it is a new thing and it is probably far more difficult to work. It is not because of the cap it is actually because you expect the LPG customer to come and provide his bank account to you physically unlike the other place where the bank goes and collects it. Now even there I think in the first less than a month almost one million transactions went through the banking route for LPG subsidy, which I thought was a major achievement.

Q: Let us talk a little more about the role of the banking system. Now inherently because of the low credit worthiness of the rural client banks do not see high profitability in lending in rural areas and hence there is some hesitancy there. What would you like banks to do? What are the targets that you would like to set for them and how do you think that this process of bank’s lending to the poor can be strengthened?

A: I think that is a mindset, which is prevalent amongst people like you and I, where we think that the banks suspect the rural poor, I don’t think that is true. What actually happens is that for priority sector lending, they are large numbers and they are small amounts. So, it is a little more difficult for a bank to handle these cases. That is about all.

In the experience of people who have dealt with them it is - I don’t think there is anything negative about a small borrower at all. They are as honest as anybody else. But margins are naturally lower

Q: Cost of infrastructure is higher?

A: Yes that is obviously there, but then that is part of a social objective of the bank. After all why are the banks being asked to open their branches in unbanked areas, it is part of the game.

Q: What would you like banks to do? What would you like the focus areas of the banks to be as far as financial inclusion is concerned?

A: No, I would say that if the banks did what they were supposed to do we would be very happy and that is what they are trying to do, so we are trying to give them all the help we can. They have targets, they can achieve them and that is about good enough.

Q: The RBI has also outlined these targets for foreign banks and they will come into effect five years from now. Now foreign banks say that these targets are very difficult to meet and it would be easier for them to have less than 20 branches. So, how do you think the policy needs to be framed for foreign banks?

A: I am not a great supporter of having a different policy for different people. I think if you work in an environment everybody must conform to the same rules. So, if I want to play football, but I want to play with a table tennis bat then that is my problem, I don’t think the problem lies with the game of football. So, we have an environment here, we have policy guidelines here, we have rules here. Anybody who wants to function in our system has to conform to those rules.

Q: The national financial inclusion plan now, which outline financial inclusion from the period, from 2010-2015. Now you had said that there should be one bank branch in every village, which has a population of above 10,000 then above 2,000 that has been achieved to some extent, from 2013 to 2015, how would you define the roadmap and what would you like the targets to be?

A: No, it is as matter, which is largely speculative as of today. I can’t outline something which is going to happen two-three years from now, but there is a definite thrust towards opening of branches and we already have incidentally more than a lakh and about (not sure) 5,000-10,000 branches all over the country, I am talking of scheduled commercial banks, I am not talking about the other banking system and we have a total of maybe 6.5 lakh villages in the country.

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So, we are moving rapidly. We are also encouraging the banks actively to going in for putting up ATMs where the bank branches are that basically makes a bank operative 24 hours a day and also to put up ATMs where bank branches are not there, which also makes it very easy for a person to access their money and to get the facility of banking even without a physical brick-and- mortar branch being there. But let me at the same time emphasise that genuine financial presence of an institution would be ultimately when a brick-and- mortar branch comes to that area, so that is what we are all looking towards.

Q: You have spoken about branch penetration in great detail. The other aspects of financial inclusion are penetration of deposits as well as credit penetration. Now in case of deposits you see a large degree of reliance on chit funds and we have seen the problems in that area, you see reliance on non banking financial companies (NBFCs). Do you think we need better regulation? We need to accept that these are the last mile; they have more accessibility to the last mile and hence effective regulation in these and giving them more space?

A: Again, we have got two or three different questions here. One, I think I clarified right in the beginning that the absence of banks and regular financial institutions in these areas is leading to the moving in of money lenders. I call them fly-by-night operators. I am not referring to legal chit funds here. There are all kinds of other get-rich-quick schemes, which are being touted as means of making quick money by these people. In my view, most of these are able to exist because of the absence of banking infrastructure in these places, so that we are trying to address as I said right in the beginning, that is point number one.

Now point number two is, there are two kinds of people that are operating out there other than banks and financial institutions, one is the chit funds who are legally allowed to do so and they are duly controlled and licenced and so on by the state governments. So, they are fine. If they do anything wrong, there is a law dealing with them. So, those activities are under control. But there are other categories of people who you are probably referring to when you raise this point, who are out there and who are doing all kinds of things, so that is a separate ball game altogether and we are taking whatever action is to be taken as you are aware.

Q: For Micro Finance Institutions (MFIs) in particular the Malegam Committee had given interest rate, infact margin caps as well as trying to deal with over indebtedness and multiple lending, the sector feels that it has no space left to breathe and profitability is a key objective if they are to meet the targets of financial inclusion and microfinance has been effective in providing financial inclusion. Do you think those recommendations need to be re-reviewed and the bill, the microfinance bill needs to be given a kick-start?

A: I don’t think that the microfinance institutions that are functioning on the basis of what we have seen are doing so badly at all. There are certain rules of the game, certain margins etc. have been spelt out, which are okay. In my view that is good enough and at the moment, I think other than an odd noise from here, odd noise from there I don’t think there is much of a problem at all.

Q: I think one of the key challenges now is the fear of the formal financial system among the rural poor. An interesting story, I was talking to somebody in a village who said that they are scared of the armed guards outside banks. So perhaps you need financial literacy at this point in time to not only make people aware of the formal financial system, but also access to micro insurance, to pension schemes as well as to other savings products. How do you think the government needs to focus on financial literacy as a target at this point in time?

A: There is a fear of entering into a place where you think you may not be welcome, it is human to be afraid of the unknown. I don’t know what is happening inside there, they won’t welcome me, that kind of an approach for a poor man. I think the biggest boon for the poor man is going to be DBT because the banks are opening their accounts. They will give him easy access to his money and the minute you get access to the money you will realise that this is a pretty safe, fair and a good system.

It is a place where I can park my money, those people are not going to eat me up, that gunman is not going to shoot me, I am as welcome here, my money is there, and I can collect it anytime. I think that fear goes. Once you start dealing with an institution, it is like driving a car. The first time you sit behind the wheel it terrifies you, after a couple of months you are wondering what you were worried about, it is as simple as that.