Inclusive Bank - Need of the Hour

B. Yerram Raju, Economist & Risk Management Professional

RBI Governor Raghuram Rajan’s strategy of widening and deepening the banking system through payment banks, India Post Bank, small finance banks and strengthening the NBFCs through appropriate regulation and facilitation deserves rich commendation for taking inclusive banking closer. But doubts still prevail over the effective reach of inclusive banking going by the laggard performance of the priority sector credit thus far.

Differential Interest Rate scheme of late 1970s, finance to weaker sections, agriculture and Micro and Small Enterprises (MSEs) continue to be unattractive for the banks as they require cost-intensive timely monitoring, frequent client interaction and effective supervision.  To make the direct lending portfolio attractive, even commercially feasible lending portfolio has been brought into its fold.

Still, their performance is far from satisfactory. Never did the banks achieve the target of 18 per cent set for agriculture and 15 per cent for MSMEs since 1980s. Going by the RBI statistics, priority sector credit has grown in 2015-16 thus far only by 5.4 per cent. The growth in agriculture sector lending has been of the order of just 7.9 per cent. In regard to MSE it is much worse at just 1.3 per cent with a negative growth of -2.1 per cent in manufacturing MSEs.

Agriculture and MSE credit should be delivered at the clients’ doorsteps with extension. Innovations in lending to these sectors demonstrate that even the small and marginal farmers taking to natural and organic farming also have been successful, al bait, in patches. These successes are prompted by effective forward and backward linkages that cannot certainly come from the existing banks. NABARD has showcased some success stories through alchemy of grant and loan support.

Now that the RBI started different banks for different purposes that certainly need not have huge capital base, it is time to create a separate bank for agriculture and MSEs but in a non-banking sphere. Nature of capital, type of regulation etc., would be the matters of detail.

NBFCs are already lending for MSEs more efficiently and with less errant loans. Even the guarantee mechanism does not exist for them. NBFCs proved their advantage due to their low transaction costs, quick decisions, customer centricity and prompt service. Their products and services complement the banks.

Some NBFCs functioning as Trusts have also the advantage of professional management, continuity, objective exercise of discretion, insulation for the individual trustees, protection against misappropriation of funds.

Away from the Basel capital norms, if prudential regulation can be tweaked appropriately, non-banking banks can be a better option than commercial banks to extend loans to agriculture and MSEs.

There is neither reserve capital nor restrictive deposit-credit ratios. Further when supply of credit increases through good number of local Trusts, interest rates in open market channels could come down to easily affordable levels.

There are several global funds seeking avenues for socially beneficial investments. If good portfolio with appropriate monitoring mechanisms is available, these funds would be prepared to invest in such banks as donors; but certainly not under the traditional banking regulations. It is not difficult to bring in innovations into regulatory regime. Such funding can go with recognised guarantee and insurance mechanisms under PPP mode.

In donor-led funding, efficiency of capital is measured by the sustainable social benefit it has created.  Losses arising out of seasonal failures and market fluctuations could be monitored and supported through relief mechanisms engineered by the borrowing groups and donor institutions with collective thinking and shared mechanism. These institutions can also resort to securitisation involving pooling of financial assets or loans together as a reliable and competitive source of funding, going by Moody’s latest Report (2016).

Moody’s also acknowledge the role of NBFCs in India and China as key providers of credit to individuals and small businesses that would otherwise have limited access to bank loans or would incur high interest for such loans.

India is at the cusp of change. All the rating institutions, World Bank, IMF etc., are projecting India as the icon of future growth in the globe and leader in Asia. This is the time when we should also innovate into institutional framework for sustainable development of key sectors like agriculture and MSEs. Reinventing banking through non-deposit banks makes good sense for the future of inclusive banking. This is the time for such Inclusive Bank.

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of INCLUSION. Comments are welcome at

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