Fighting challenges to transform banking in rural India
(Any opinions expressed here are those of the author, and not necessarily of Reuters)
India’s new program to transfer welfare payments directly to the nation’s poor has been touted as a near-revolutionary way to protect people from high-interest moneylenders, bureaucracy and bribes, and to help people improve their lives. Like many government programs designed to change the lives of millions of people, it has raised doubts about how well it would work.
I recently visited a couple of villages in Udaipur, the so-called city of lakes in Rajasthan. I wanted to see how the program is going in its early stages. My initial conclusion: it’s a big challenge.
Transferring cash directly means that the government wires money to people’s bank accounts. That avoids the traditional method of standing in endless lines at the post office, often making them easy pickings for corrupt bureaucrats looking to skim some of the cash off the top. Banks, despite what we have read, are often willing to venture into the hinterlands to set up accounts. Getting people to take them is another story.
Some officials of a government-owned bank went to survey a village in Udaipur, only to receive a rude shock — one family, petrified to see the bank officers, shut the door in their faces and wouldn’t deal with the officers until the village head man intervened.
“They feel insecure to see officers at their place, they fear we might rob them of their money,” said Praveen Kumar Agarwal, assistant general manager at State Bank of Bikaner and Jaipur, a subsidiary of State Bank of India, the country’s biggest lender. “It takes a lot to convince them, very difficult job.”
To help meet the stiff target, Agarwal cancelled annual leaves of his staff and worked late nights and on weekends in order to process the mounting pile of account opening forms. The effort, however, did not go in vain. About three months ago, only 30 percent of people who fell under the bank’s service area had an account. Now, after overcoming challenges, the bank has opened a bank account for every family in the district.
Other challenges presented themselves.
When banks set up small centres, or camps, for opening accounts, villagers thronged after hearing rumours that the government would give away money to account holders. Two pregnant women whom I met at a similar camp in another village in Udaipur said they were there only because they thought they would get money if they had a bank account.
“Such rumours will do no good,” said a junior officer at a State Bank of India branch in Udaipur. “People will open accounts hoping to get free money, which if they don’t get will make them feel cheated. They might think we banks robbed their money.”
Based on the time I spent in the villages, it seems like the challenge is surmountable. Although banks are working on low-cost technology models, the government can help. One idea: reimburse some of the transaction costs that banks incur in running the program. Right now, banks, both government-owned and private sector are not getting compensation of any kind for being roped into this. In fact, banks are staring at an additional cost burden of 250 rupees to 500 rupees per account annually and don’t expect profits for at least two years.
Then there is the question of basic education. According to rough industry estimates, a majority of bank accounts that were opened over the last few years for the poor are dormant due to inactivity and insufficient funds. Banks could help; some are encouraging people to open small recurring deposit accounts and take loans against gold, instead of turning to money lenders.
Banks also could set up training sessions to explain to villagers why holding an account is important, and how people can learn to save and invest money in various ways. They also could encourage villagers to look at possibilities for their small businesses that they might not have thought about before. For example, women in a village can make money by stitching and embroidery if they get funding for land and machinery. It’s the bank officers who can explain to people that these options exist. Otherwise, the villagers wouldn’t know.
Though the task might appear to be a daunting one, a joint effort by banks and government can make direct cash transfers and rural banking a success. “If we can do it in a generation, it would be wonderful. I don’t think we should look at early gains,” said Anil Jaggia, chief information officer at HDFC Bank. “This is a journey”.
A bright future for Indian banking
BY ____Mahua Venkatesh and Zehra KazmiCollected from Hindustan Times
A decade ago, transferring money from your account to a family member's would have meant a visit to the nearest bank branch, a long queue and a few days-long wait. Today, you can use your mobile phone to make the same transaction instantly.
Innovations such as automatic bill payments, cash transfers through mobile phones and online banking have ensured that customers no longer have to make pilgrimages to bank branches. Passbook entries have been replaced by hassle-free e-statements; ATMs facilitate easy withdrawals and payments.
Most importantly, banks have been able to ensure that all these transactions are safe and secure. Banking in India has rapidly innovated to keep up with the times. Banks today are competing heavily with each other, offering low rates on housing loans, credit cards to anyone who answers those annoying tele-marketers and freebies for existing customers. So, how do they stack up against each other?
The HT-MaRS Bank and Credit Card Satisfaction Survey 2012 ranked banks according to customers' satisfaction across various categories. According to the results, India's second-largest private bank, HDFC, emerged as the winner, dethroning 2010's champion, Axis Bank (which slipped to third place). ICICI Bank moved up one place from the previous survey to the second position. Though private sector banks may have got the top spots, ahead of public sector ones, when it comes to satisfying consumers, the top 10 list features more state-owned banks. Bank of Baroda bested the mammoth State Bank of India, improving drastically from its 12th position in 2010 by landing the fourth position over-all, becoming the best government-run bank.
The survey ranked banks across five parameters, namely account opening, bank staff, branch facilities, turnaround time and account-related services. Each parameter had various attributes on which customers were asked to score their banks.
Compared to 2010, there has been a marked increase in over-all satisfaction scores. Indian Bank, Indian Overseas Bank and Canara Bank fell out of the top ten while relative newbies such as Kotak Mahindra Bank and Yes Bank, which featured nowhere in the 2010 list have inched into the results. Results vary from town to town, but residents of Chandigarh seem the most satisfied with their banks, stamping their approval with a high score of 829 points.
Changes ahead
The contours of the banking industry in India is set to change in the coming years with Parliament passing the much awaited Banking Laws Amendment Bill last week. The passage of the bill paves the way for the Reserve Bank of India to come out with final guidelines on issuing new bank licenses. This not only means more banks, but the style of operation is also expected to be different, with the upgradation of technology.
The contours of the banking industry in India is set to change in the coming years with Parliament passing the much awaited Banking Laws Amendment Bill last week. The passage of the bill paves the way for the Reserve Bank of India to come out with final guidelines on issuing new bank licenses. This not only means more banks, but the style of operation is also expected to be different, with the upgradation of technology.
At present, over 70% of the market lies with the public sector banks but the government is now geared up to open the sector to more foreign players while setting up new private banks in the country which would help in bringing more people under the banking net. Several business houses including Aditya Birla Group, the Tatas and Reliance have evinced interest in entering the Indian banking space. Besides the corporate houses, even non-banking financial corporations can now convert themselves into full-fledged banks.
While allowing more banks to be set up, to encourage healthy competition in the market, the government could also look at consolidating the public sector banks with a view to creating mega-banking entities which could face up to stiff competition from others.
Evolution
The government under late prime minister Indira Gandhi nationalised 14 commercial banks in 1969. The second dose of nationalisation happened in 1980 when 6 more commercial banks were nationalised. The move, according to the government then, was to provide more control of credit delivery. In 1993, the government merged New Bank of India with Punjab National Bank. The Narasimha Rao government in the 1990s embarked on a policy of liberalisation, providing licenses to several private banks, which came to be known as the new generation banks.
The government under late prime minister Indira Gandhi nationalised 14 commercial banks in 1969. The second dose of nationalisation happened in 1980 when 6 more commercial banks were nationalised. The move, according to the government then, was to provide more control of credit delivery. In 1993, the government merged New Bank of India with Punjab National Bank. The Narasimha Rao government in the 1990s embarked on a policy of liberalisation, providing licenses to several private banks, which came to be known as the new generation banks.
With liberalisation and changing economic dynamics in the country, the UPA government is now keen to open up the sector to more private and foreign players.
"The dynamics were different pre-liberalisation and they are very different today and we must move with the times," a senior finance ministry official, who did not wish to be identified, said.
(With inputs from Abhijit Patnaik)
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