Policy Talk | Digital banking not about public or private ownership, but governance

In today’s episode of Policy Talk podcast, we have with us Professor Sachin Chaturvedi, Director-General of RIS, the Research and Information System for Developing Countries. He has recently been appointed as Vice Chairperson of the Atal Bihari Vajpayee Institute of Good Governance and Policy Analysis (AIGGPA), which is a state-level policy making and analysis institution in Madhya Pradesh. He is also on the board of the RBI and has recently authored a report on differentiated licenses and the entry of the private sector in banking. He spoke to K Yatish Rajawat, of CIPP.

Edited excerpts-

Q. I wanted to begin by asking about your report on private sector banking and, specifically, if you could talk a little about differentiated banking licenses with respect to that. 

Sachin Chaturvedi: The report that we have given to the internal working group (IWG) suggests how the 2004 and 2005 guidelines on the ownership and governance in private sector banks should be streamlined. As in 2011, another set of guidelines came in and the same with 2013. As a result it became quite confusing how it is to be done. In 2013-14, RBI issued a discussion paper; with that, this whole issue of small finance banks and payment banks came in, and we started looking into these dimensions with greater clarity.

Small finance banks, cooperative banks, the voluntary transition of primary urban cooperative banks into those small finance banks, that whole issue came up and we started looking into some of these dimensions, which were of great significance. If you look at the external sector, particularly countries like the USA, which are big democracies and have a huge market and extent of ownership that are needed. In the IWG report, you can see that we have tried to create this distinction of how you can have the capital infusion from the private sector without them actually deciding about the way money would be governed, governance of banks without getting the private sector to play that role of influencing, like what you saw in the case of Yes Bank and others, and how you can avoid the repeat of those incidents. 

Q. This brings me to the question that we still haven’t addressed the issue of digital banking. While we have a little bit with the payment banks who have not done very well because of the burden of small loans and deposits. Will we reach a stage where we address the elephant in the room, Will digital banks be allowed in India?

Sachin Chaturvedi: Absolutely right, Mr. Rajawat. I think two or three issues are important here. Digital banking, of course, is extremely important in this setting but it is not so much about ownership, be it public or private. It is about the issue of governance, and digital banking, from that point of view, becomes important because then you have the technological bandwidth to get into regulation.

Now, more and more reliance on technology is emerging. Being on the RBI board, I’m also chairing the IT committee of the board, so we are trying to see how these institutions can play a far greater and integral role in terms of the digital platforms being created for enhancing the effectiveness of governance. For example, how real time data is analysed and absorbed with the Covid-19 crisis. The RTGS and others have served us as a huge support in terms of expanding the bandwidth and expanding the gravitas of our interaction so much so the RBI has created a network with all the SAARC countries, including Pakistan.

This is hardly known outside in public circles but we are seeing that the bandwidth is leveraged by our partner countries for collective development--the currency swap -- that have come in. So you are absolutely right, digital banking would play an extremely important role;  the growing reliance by the RBI on this is going to provide not only greater scrutiny, reliance and scope for better governance but would also pave the way for our wider global linkages.

Q. So will we see digital banking licenses going forward?

Sachin Chaturvedi: In fact, as I saw in Madhya Pradesh’s Barwani and Dhar districts, the bank outreach is limited and the BCs are providing the technology solutions that are needed for deposits and withdrawals-- I think this is important. Digitisation has helped--that’s the way forward and the discussions are on for digital currencies, etc.

Q. The separation of digitisation of banks and banking services to digital banking licenses==I’m drawing this difference because digital banking licenses, by their nature, will be branchless banking and all our banking regulations have traditionally been  branch-based. We say that you’re allowed to open a branch, not allowed to open a branch here or open more branches in rural areas, therefore, the core of banking regulations has been based on branches. While in digital banking licenses, if a bank was to go completely digital, it wouldn't have any branches, except maybe one large central headquarters. How will this anomaly be handled from a regulatory point of view?

Sachin Chaturvedi: Mr Rajawat, the heterogeneity in development across the country is extremely profound and the challenges aren’t common. Priority sector lending is extremely important and from that point of view, the bank branches would have to be present in the areas where they can do the heavy lifting for the development deficits that we see.

Q. You just mentioned BCs. They work extremely well with digital banks. Most rural branches are loss-making. Banks aren’t keen on opening it but they are keen on giving BCs a right to expand their services so it’s not an either-or situation, it’s a situation where you’ll actually facilitate better banking services in the North-East if you had digital banks and BCs roll out services there. The cost of service, servicing and lending would be lower because you are taking out the establishment cost, the second highest cost in a bank. Rentals, salaries, branches and gratuity go away and therefore is quicker to roll out. 

Sachin Chaturvedi: That is true. We are also having other challenges if everybody is trying to focus on a few niche areas where margins are high and the cost of transactions are low because that would be the tendency of all. So you need to see how the whole country is covered and not covered by one or two scheduled commercial banks alone but by everybody including those which are getting into digitalisation. We are having a huge struggle with several foreign banks.

We are continuously seeing for the last four years that the Reserve Bank has been continuously telling them on data localisation, despite several reminders, guidelines and timelines. Only after Master Card failed continuously, did the RBI come out with their directive. It is becoming an issue in terms of how actors, particularly private sector, foreign branches of the banks and other entities like credit cards, etc., are prepared to do the heavy lifting.

We shouldn’t forget that even when our banks are given licenses they also have to do this, whether they are placed in Singapore, New York or any other part. These guidelines by the Central Bank or the Federal Reserve System have to be followed so I think it is important, but I see your point in terms of reducing the establishment costs by the banks. 

Q. Now, you’re a part of the Atal Bihari Vajpayee Institute of Good Governance and Policy Analysis (AIGGPA). From your work at the RIS and having worked with the Central Government for years and especially at the national stage, now you’ve moved to what happens at the district and state government level.  I think that is very crucial for policymakers or an expert like you. What is your learning from the last few months as to the difference in what happens on the ground and what is thought about by policy makers at the top level? Where is the gap?

Sachin Chaturvedi: Excellent question, thanks Mr. Rajawat. I just completed my two months yesterday. However, I have already travelled across 7 districts in Madhya Pradesh and have met district level, block level and some Zilla Parishad members. 

I see this as a huge deficit. Fortunately or unfortunately, I have been focusing on International Trade for the last 30 years and based in Delhi and a couple of foreign universities,  I have been trying to see a macro picture at a global level and seeing India’s International trade participation from WTO and other perspectives. I’m aware of how the production part actually gets linked with our exports. Madhya Pradesh  is one of the landlocked states and I had the opportunity to study Bhutan, Nepal and some Central Asian countries. I saw that all of them had trade agencies because trade aspirations are there even among landlocked countries.

In Madhya Pradesh, I was surprised to see that they still need an institutional framework to promote exports and, though they are landlocked, they are at the heart of the country. All the containers.. they have to move through that state . So, you would be glad to know that the first thing that I've discussed with the Chief Minister--they have agreed--is to have a logistics policy announced soon and fortunately, with Asian Development Bank, we could connect to have an app that can quickly clear the cargo consignments that are passing through the state. So, without interruption of any kind, without any disruption, the travel is, to be in short, a seamless flow of trade; that also brings in intra-district trade that is of significance.

The first and foremost thing I am realising is the reality at the ground, and I look from a development perspective which has also been our forte. I give you an example of sustainable development goals for instance, how at the national level, where India is lagging behind and how at state level, they need to capture. So, the idea of the sustainable goals, the targets and the indicators. And the indicators for the 17 goals are somewhere close to 169 indicators. So, how department wise, interwoven targets that you look at and the interdependent indicators that you look at, involve many departments in one go. So, goal six is crucially dependent on sanitation, it is dependent on water supplies and it is also dependent on water bodies that you’re creating. 

Q. Multiple departments and multiple ministries at the state level and not all of them align on the same goal. The irrigation department will be aligned on some goal, the sanitation on some other goal and I don’t think they would be aligned on a SD goal, so I now understand the challenge that you are observing.

Sachin Chaturvedi: So what, fortunately, the Madhya Pradesh government has done is that, apart from bringing AIGGPA, the Atal Bihari Vajpayee Institute of Good Governance and Policy Analysis, they have also established a state Niti Evam Sewa Aayog  of which I am Vice chairman of. These two institutions have been combined. So, as Vice Chairman of Niti Aayog of Madhya Pradesh --they have given me status of cabinet minister--I am able to convene other department’s Principal Secretaries as well on one platform, like logistics, policy.

I could chair the group because of the status that the Chief Minister has given, and also the ability to convene all the departments together on one platform. So, research is one, but the action is also coming in here because of this additional position. And, that way, Mr. Rajawat we have to see at the ground as to how we do away with the departmental distinctions because convergence is the way forward; that way, some states are doing fantastic work; Orissa has, in 2019, launched a new programme called Convergence because that convergence is happening at the level of beneficiaries. Orissa ‘s this effort is trying to connect all departments at the level of beneficiary, so a beneficiary need not run to many departments but all departments are being convened through the convergence scheme that is largely targeted at Orissa’s huge tribal population. This convergence is now delivering at the grass-root level. I think we have some way to learn from each other and see how, at the citizen’s level, how these programmes converge.

Q. Interesting. Recently, I was having this conversation with one of the aspirational district commissioners. So, he was telling me something very interesting, the government is trying to combine elements of MGNREGA, labour components with a lot of other schemes like the Jal Shakti Mission or the irrigation department schemes or even, the Urban Housing or the affordable housing schemes. But, while the plans are made great in terms of combination, at the Union government or Delhi level, and at the state or district level, there’s hardly any capacity to conceptualise the project of affordable housing. For instance, MGNREGA envisages conceptualisation by a Sarpanch, the District Panchayat Officer, and the District Commissioner, but they don’t have expertise of conceptualising an affordable housing project along with MGNREGA. The schemes have not failed because of intent, they have failed because of the non-capacity of conceptualising projects. This we have seen successively over the years. Schemes don’t fail because of intentions, cause intentions are always good. Good intention does not result in good implementation. Now with this, is there a certain goal or target that you have in mind that you want to achieve in the next 3-4 years while you are there, in terms of better implementation of schemes?

Sachin Chaturvedi: Definitely. Really you have pointed out the most important and very crucial point in this whole idea of outreach, particularly from a development perspective. I would give you just one example to illustrate the point that I am trying to make.This is something that the Chief Minister of Madhya Pradesh launched two weeks back. It’s a new scheme called ‘Devaranya.’ which is trying to address the requirements of a tribal population. Madhya Pradesh’s tribal population is something like 21% of the state’s. So, 5 tribal districts have been chosen; the idea is that our Community Forest Right Act, which was actually passed in 2006 and has not been implemented so far. Not that they don’t want but the structure is such that it hasn’t taken off.

There are several states which have done that. So, last month actually, the Ministry of Environment and Forest in Delhi and the Ministry of Tribal Affairs came out with joint guidelines to operationalise the Community Forest Rights Act. This has paved the way for the two to work together. Under Devaranya, what has been identified is that the Gram Sabha would identify a small set of residents of the tribal population--a group of 10 and their SHG--and this SHG would grow their own medicinal and aromatic plants being supplied by the NMPB, the National Medicinal Aromatic Plants Board of AYUSH Ministry. This plantation would be funded by MGNREGA. They would be herbs or shrubs so they would have a value for one or two years to be fully realised. Under the MPLAD programme and under AYUSH Ministry’s project, they would be given some machinery for primary value addition. Then, five companies have been linked with this scheme to have the buy-back arrangement.

So, the state is not intervening in any way. No minimum support etc. State is out but the state is playing the catalytic role, the facilitative role, and this is the way the success of future welfare programmes will come from. You have to connect the market, you have to allow the market, but you also have to bring in the governance mechanisms for the market to abide by the rules and regulations. And this is the example which I wanted to mention in response to your point that schemes are well intentioned but implementation is bad. So we are doing away with implementation, and we are also doing away with the role of the state in terms of governing it.

Let people and the market connect; connecting them  on the most optimum level is the role that the state has to play so that there is no exploitation nor any kind of disruption. So, you facilitate in a manner that both parties do the role that they are expected to do. Tomorrow it should not happen that the private sector says that the planting material, the quality material is not there, so you supply the quality material, get it vetted by the private company So, if the good material is needed, they would grow the good material. So, this is how this Devaranya is going to set in new examples of governance that I think are going to be the way forward. 

Q. It will be good to see the success of this scheme. I was reading some of the reports by AIGGP and one of the interesting reports I saw there, and this is the first time I have seen a state level report, was on Agri Solution Centres and it was quite firm and clear about the reason for its failures and including the fact that a pilot ASC was not set up, the one that were set up were not set up in a proper manner, and just the fact that too much was tried to be  done in a public or a government set up than could be done profitably in a private set up.They just tried to do too many things. Any policy which has too many objectives is almost a prime for failure in the sense that it can never meet all the objectives. What is your observation of the learning that the state has taken from the ASCs? Are they doing something about it? Are you suggesting something new in terms of collaboration with the private sector like in Devaranya?

Sachin Chaturvedi: In Devaranya we have tried to see how multiple targeted interventions bring in the optimum results. So, any new intervention, particularly the programmes such as ASC involve multiple services, stakeholders, pilot projects. They would help us in implementing, and also support the implementing agencies in identifying the field level challenges in execution of the programme which in turn may provide inputs for policy makers in doing course correction in the scheme designs before it is launched.

So, it is important that those schemes are preconceived in terms of possible  challenges and disruptions, because coherence and coordination are the crux if multiple interventions are targeted, or multiple stakeholders are coming in. And that I think would help build some sort of confidence among the farmers because of the effectiveness of the technology coming in. But some training is required of the people. Suddenly, if you bring in, something that has happened in the case of ASC, the acceptance by the farmers--the role that the extension agencies have to play--it's not going to go forward. For instance, in Barwani district, I visited a private company which is doing tissue culture that is far more effective than the ASC scheme because the private sector has some 500 tribal women, and they all are class 3 or class 4 failed, and they have been trained for tissue culture. They are doing mass multiplication of banana and bamboo tissue culture. And you would be surprised to know, banana is the most profitable production in Barwani and goods are exported from Madhya Pradesh via Maharashtra.

So all the value addition happens in Maharashtra if it is processed, otherwise even raw bananas are being exported. But if the Agri Solutions are  not adequately processed at the systemic level, then it is not likely to go forward. So, I think those theoretical insights which some business schools might be talking about, I think are important for us to see how  we take that forward. It is important to build knowledge which is likely to have a public policy sort of formulation process, more thoroughly linked with the development tools that we have been talking about.

Now, the system has changed, the requirements have changed, you can’t run the public policies schemes with those old tools. You need to change those tools. You have to leverage more technology and leadership skills that are needed. You need to bring in tools that are more social sector oriented. They have to bring in evidence, and a continuous course correction is required; evidence-based public policy is not a one short solution, it has to be at various levels and continuously, to be rediscovered. And thus, the AIGGPA report reflects precisely on this continuous revaluation process. That, I think, is probably the way forward.

Q. That’s  good  to hear . I hope if ASC, if reinvented, are reinvented in the PPP model and you know, the example of the banana tissue culture, that you were talking about, if that is taken as a case study and where the private sector runs the ASC and the state only develops the rules, and say ‘we’ll give you the land’ or ‘we’ll help you get the capital’ but it is run by somebody who makes the business out of it.

Sachin Chaturvedi: This is what Devaranya stands for. The government is giving you forestry land, the government is giving you the trained human resources, and then, they are giving you the capital investment for primary value addition and then you’re done. You’re in touch with a private sector which is going to the second stage value addition or the third stage because branding, marketing etc, Dabur and Emami would do far better than any tribal grouping can ever imagine to do because they are specialised in that. 

Q. Sometimes, the state tries to do too many things that they shouldn’t be doing and sometimes, the policy makers do not realise that at the ground level, it is impossible to do all these things. It’s good to see your fresh thinking especially on evidence based and data based policy making. I would have liked to continue this conversation furthermore but I am coming to the end of my slot for this particular programme. I would like to invite you again, maybe after 2-3 months when you have settled in, furthermore with the AIGGPA, and talk a little more about that, and also about the digital banking license in furthermore details. Thank you very much for joining us.

Sachin Chaturvedi: Thank You.                   

For previous episodes of Policy Talks see here and here