On the 25th of last month, the Reserve Bank of India Governor, Y V Reddy, speaking at a seminar at the Indira Gandhi Institute of Development Research, reiterated that the central bank would not allow micro finance institutions (MFIs) to collect deposits.
This came as disappointing news to the micro finance practitioners who had been for long lobbying with the banking department in the ministry of finance to convince them that it was necessary to allow MFIs to mobilise savings.
Probably, the RBI was aware of the speculation and hope among micro finance practitioners that the banking department was indeed convinced of their case and might in turn be able to influence the RBI. And the governor's statement was to end that speculation.
The RBI's reticence regarding MFIs is understandable. The central bank does not want to encourage, as one practitioner put it, "FBNCs or fly-by-night companies". But is the central bank being too simplistic in order to lessen its supervisory duties?
By not allowing the MFIs to collect deposits, the problems of a lack of savings instruments and institutions for the poor, just do not go away. They are merely compounded. The poor do need and do make use of financial transactions, be it savings, loans or money transfers. But the means they use are mostly informal. And so not the central bank's problem.
The timing of the governor's announcement was also unfortunate. Because it was only in recent months that a few banks led by an innovator like ICICI Bank was thinking of using the MFIs (which by crude methods of approximation number about a thousand) as agents for both savings and credit delivery. The deposit would then be guaranteed by the bank and the MFI would just be a pass through or transaction agent, much like the PCO booths are for the telecom companies.
But with the central bank taking such an unequivocally tough stand, it may well be that the banks may do a rethink. In the context of their total book, micro savings or credit would be such an insignificant part that it would not be worth incurring the wrath of the central bank.
So these newly formed departments would shrink, the hype toned down and life in the ivory towers of Ballard Pier or Bandra Kurla Complex would go on as usual. The only casualty would be the poor.
But the reality is that over 70 per cent of India's population lives in the rural areas and nearly 30 per cent below the poverty line. It is also true that thanks to nationalisation formal and semi-formal financial services are within the physical reach (within 5 km distance) of 99 per cent of the Indian population.
But any of us who have ever cajoled and coaxed our household helps or drivers or gardeners to save and then accompanied them to the nearby bank branch know how petrified they are of the bank, the bankers and the forms and procedures. Many accounts opened similarly under coercion remain dormant while the account holder continues to use her pillow for safekeeping.
But while the RBI, the banking department the MFI association all debate on whether or not the MFI is the right vehicle or the post office with its almost complete presence over all of rural India is a more suitable vehicle, a big point is getting missed. And that is the size of opportunity. I quote from a study conducted by Basix of Hyderabad on behalf of the World Bank in August 2002:
"A study by the National Council for Applied Economic Research, based on a large sample survey in 1994-95, showed that the average income of rural households in India was Rs 27,411 per annum (as against Rs 57,675 for urban households). The annual savings were Rs 5,056 (as against Rs 13,080 for urban households). However, in the study, 'savings' are defined to include savings in the form of physical assets as well financial assets. The annual average financial savings of rural households were Rs 1,804 or 6.6 percent of the income (as against Rs 6,994 or 12.1 percent for urban households). By 2002, with inflation as well real growth, this number is likely to be in the range of Rs 2,700 per household. With approximately 145 million rural households in 2002, the total rural financial savings would be in the range of Rs 400 billion (Rs 40,000 crore) or $8 billion."
While one can argue about what the figure would be today, the only argument that would be relevant is how much of this saving can be brought into the mainstream financial market.
Because the banks of today are aping the West and preferring large but infrequent transactions, while the poor need exactly the opposite: frequent but small transactions. And unlike the rigid rules of the banks or NBFCs, the poor need flexibility in savings and loans schemes.
Surely for a country which could solve its foreign currency reserves problems, cap its many hued financial scams, establish world class stock exchanges, stop loan melas and stem mounting NPAs, it cannot be too much of a task to grant, in a real sense, all its citizens their fundamental right -- that of risk free savings.
All those financial whiz kids from the IIMs who are being swept up at unmentionable salaries by the Citibanks and Merill Lynches of the world could even think of this tiny Indian problem in their coffee breaks from high finance. India is shining, India is at the forefront, let's bring up the rear.
(The columnist, a former journalist, has worked in the financial sector.)
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