Banking Sustaining through social cause

Abstract: The banking reforms which were initiated in 1969 by Mrs. Indira Gandhi have not seen their way through. One might argue that in 1969 there was only one branch catering to the needs of 65,000 people; today it stands at around 15000. In 37 years the development looks good. However considering the growing needs of India and the world, we will need to reach to every possible person. Now, how the banks can reach to the common man without upsetting their profits? This article tries to answer that. Couple of years back, small news in a daily news paper caught my attention. I read an old aged man was complaining to the reporter about the agony of his life. His only son was in Dubai from where he used to send money to his parents. Parent mostly dependant on him, had to travel 40 kms to withdraw money. Thanks to the only bank shared by the 3 adjacent villages. That old man was requesting the reporter to publish his story so that the policy maker and government could hear him. After reading his story I got the biggest shock of my life. I am habituated to see one or the other bank at every 40-50 feet. However, I failed to comprehend that the banks which are present everywhere in cities have not penetrated to the deep rooted villages of India. What could have been the reason behind this? Are the government policies not favourable? How come Government has not heard the voice of rural India? Is rural India not a part of India? Is India restricted to cities only? Is rural India suffering at the expense of cities? If it is so, is that justified??? This incident made me to scorch the pages of history to know more about the wonderful system called as banking. This article tries to come back with some of the possible solutions. History of banking in India The history of banking traces its roots to 1809 when Bank of Bengal was established. After some years, in 1840, the Bank of Bombay was constituted with a capital of Rs. 5,225,000. This was followed by the Bank of Madras, formed in 1843 with a capital of Rs. 3,000,000. On 27th Jan, 1921,these banks were amalgamated into Imperial Bank of India by the Imperial Bank of India Act, 1920. This act did not give

the bank power to issue currency notes. However it was allowed to hold govt balances and manage public debt. Even after the establishment of Reserve Bank of India on 1st April, 1935, Imperial Bank of India was given the privilege of acting as an agent of RBI in locations where it had no branches. On 1st July, 1955, with the nationalization of Imperial Bank of India, it was renamed as State Bank of India. On 19th July, 1969, 14 major banks with deposits exceeding Rs. 50 crores, were nationalized. On 15th April, 1980, 6 more banks were bought under the umbrella of nationalization. Reasons for nationalization Numerous reasons can be cited for nationalization of 27 banks. However, following are the prominent ones. 1) The need for nationalization was felt because government believed that private commercial banks were lacking in fulfilling the social & developmental goals of banking. Also it was felt that in order to reap more profits private enterprises were neglecting the social aspect of banking. This was evident from the fact that the industries share in loans almost doubled between 1951 and 1968, from 34% to 68%. On the other hand, agriculture which was a major occupation (and still is) received less than 2% of total credit. Other key areas such as credit to exports and small scale industries were also neglected. 2) Since most of the banks were owned and managed by industrialists and big businessmen, numerous malpractices were reported. Due to this public was losing its faith in the banking system. 3) In order to maximize the profits, most of these banks confined themselves to cities and completely ignored rural areas. If this would have continued, there would have been a significant divide between urban and rural life. Nationalization of banks was done not with the view of profit but with a view of mass serving. Challenges for Indian Banking As mentioned earlier, the objective of nationalisation of bank was to reach to the masses. The formation of Regional Rural banks and Cooperative banks was done to achieve the same objective. However, even after the 37 years of bank nationalisation, this objective still remains a distant dream. As per Reserve Bank of India, the number of savings bank account, assuming that one person has only one bank account, (which assumption may not be correct as many persons can have more

than one bank account) it is found that only 59% of the adult population in the country have bank accounts. In other words, 41% of the population is unbanked. In rural areas, the coverage is 39% against 60% in urban areas. The banks are unable to reach to the certain sections of the society. They are marginal farmers, landless labourers, oral lessees, self employed and unorganized sector enterprises, urban slum dwellers, migrants, ethnic minorities and socially excluded groups, senior citizens, women and disabled people. The bankers argue that it is not easy to reach to these people. Apart from numerous reasons cited, the significant ones are the difficulty in getting legal documents and the higher cost of banking with them. So then how to reach up to the masses without losing money? Let us try to find out some answers to these questions. 1) Is Self Help Group (SHG) the answer??? Let me introduce you to a magnificent concept of Self Help Group popularly known as SHG. SHG is essentially a group of people usually from the rural areas. Banks usually constitutes a group of minimum of 10 or more members, preferably woman. It then helps and encourages them in procurement of loan as per their requirement. Some of the initiatives taken/target set by the banks 1) State Bank of India has set for itself an ambitious target of funding 1 million SHGs up to March, 2008. 2) ICICI Bank targets 25 million new rural customers. ICICI Bank will approve loans as small as $ 100 at places such as bank branches and ATMs located every six miles across India. 3) HSBC India has launched a new product offering HSBC Pragati Finance. In this scheme, the bank will approve personal loans range from Rs. 10,000 to Rs. 50,000 with no co-lateral or guarantee. A cut above the all, AXIS bank initiative stands out. In Northern region, AXIS bank along with Basix is offering basic, no-frills banking services to poor migrant workers. Indian Grameen Services, a non-profit arm of Basix, acts as a business correspondent for Axis Bank. In an ordinary sense, it has become an agent for the bank to source business. Basix field staff physically verifies addresses and job details of the prospective customers. Once the account is opened Basix agents makes the rounds of their respective localities so that customer can meet them to transact business. They have also set up local branches. One account is linked with maximum five other accounts. Now, these five preset account numbers can transfer money only

between them. Usually the collection and delivery of money is done in cash. Basix charges 2% for this service which is quite lower as compared with postal money order costing 5%. 2) Can the postal department be an answer??? Through out the Indian history postal department has been underutilised. Isnt this the real time to uncork that potential? Can postal department reach to the masses? As on 31st March, 2003, there were 155,618 post offices in India, out of which 139,081 were in rural areas. This translates to a - whopping 89% of total post offices are in rural areas. This not only gives a readymade platform to the bank but also will save time, money and energy of regulators. 3) Reverse Mortgage A new arsenal Since this a new concept to the Indian banking, let me introduce this concept to you. It has been observed that a significant proportion of the population faces income crunch after their retirement. Due to low level of income and abysmal rate of saving they are forced to spend rest of the life in misery. This instrument, Reverse Mortgage, is an attempt to prevent this situation. The senior citizens who have their own house are eligible for a lifelong loan in proportion to the market value of their house. They dont need to repay this loan. The loan amount is recovered by selling their mortgaged home. In this system, they can get a loan either monthly or in lump sump amount. If this scheme is implemented successfully, the banks will be able to cater a sizeable proportion of the population. If data to be believed, then in 2005 India had 84.66 million people above 60 years of age i.e. 7.5% of total population. It has been predicted (UN report) that this figure will touch to 97.35 million i.e. 8% of total population by 2010. Even though the percentage looks smaller still the numbers are too high to ignore. 4) Grameen Bank way The best model to reach to everyone in the society has been laid out by the Grameen Bank in Bangladesh. The Bangladesh Grameen Bank (BGB) is based on the voluntary formation of small groups of five persons each to provide mutual, morallybinding group guarantees in the lieu of the collateral required by conventional banks.

At first, group of five prospective borrowers are formed. In the first stage, only two of them are eligible for and receive loan. The activities of group are observed for a month to see if the members are working in accordance with the rules of the banking. When the first two borrowers begin to repay the principal and interest over a period of six weeks, then the other members of the group becomes eligible for loan. Here, collective responsibility of the group serves as the collateral of the loan. Loan amounts are small but sufficient enough finance machine repair, purchase of rickshaws, buying milk cows and goats, cloth, pottery, handicrafts, etc. 5) ITC Way The potential of Indian villages have attracted the attention of corporate houses. ITC, Reliance and likewise have already jumped in the fray. They are spreading their wings in villages at a very faster pace. ITCs e-choupal initiative is a good way to reach to the rural population especially farmers. Banks along with ITC can work in the interest of farmer by way of financing for their need. In turn they will get a chance to penetrate into untapped market. Out of the few mentioned ways, there are numerous other ways to reach to the masses. However, it needs a collaborative effort from policy makers, bureaucrats as well as general public. It needs to be seen how the stalwarts of Indian banking industry make this happen. I would like to conclude this article with the following quotation. If there is one aspect in which we can confidently assert that India is ahead of China, it is a robustness and soundness of our banking system. References: 1) Shrivastav Dr. Prem Kumar, (2003) Banking Theory and practice Nagpur, Himalaya Publishing House 2) (2005, July 25) Deccan Chronicle, Hyderabad. 3) (2007, Oct) Financial inclusion Banks alone cannot fulfil the dream Professional Banker 4) Narayana Dinesh, Pierre Mario Fitter (2007, November 19) A lot in a little Business World pg. 24 - 28 Dr. Manmohan Singh, Prime Minister of India