Promoting Financial Inclusion - United Nations Development ...

that benefits. The fact is that banks do not
view such activities as profitable and, as a
result, the roll out of the schemes is limited
in scope and insipid in direction. For reasons
of political economy this may not be the
official line of bank managements but
ultimately it is local managers and staff who
determine the momentum of a rollout. If
bankers saw significant potential business in
these activities a more dynamic rollout with
real momentum would be apparent. Thus,
even the untested and unproven business
correspondent model remains still born
for lack of a business model, being limited
largely to technology service providers
opening “no frills” accounts that are largely
dormant.
So what is the solution? As an institution
whose promoters have been engaged with
issues of microfinance and financial inclusion
for more than three decades, M-CRIL has
a deep understanding of the issues. The two
key problems emerging from this report
and M-CRIL’s overall experience are set
out in the following sub-sections.
4.2 THE IMPACT OF INTEREST RATE
DE-REGULATION – WHAT ABOUT THE
POLITICAL CONSTRAINTS?
It has been repeatedly observed in this report
that low transaction volumes in small value
accounts entail very high proportionate
costs for the banks. For many years bankers
were forced by regulation to cross-subsidise
financial inclusion activities. They were
required to offer small value services to low
income families at the lowest interest rates
in the system. The well known differential
rate of interest scheme (requiring banks to
lend at 4% interest, well below their cost of
funds) still exists, though it now accounts
for a minuscule proportion of their total
portfolio. Even after general interest rate
deregulation in the late 1990s, interest
ceilings (defined as the prime lending rate,
the minimum, “risk free rate” to be charged
by the bank) continued for small value
accounts. As a result of decades of social
control of interest rates, it has become
ingrained in the public mind that “loans for
the poor” should be subsidized. The reality
of credit rationing resulting from such
subsidies is lost on the average observer.
Within the past months, all interest
rate regulation has been abandoned. This
must be welcomed in that it constitutes
official recognition that bankers must be
allowed to determine the parameters of
their own business. However, the rhetoric
of “reasonableness” pervades all circulars
from the Reserve Bank of India and
pronouncements by the government. While
there is no case for profiteering from those
living on low incomes, the message of this
rhetoric is inevitably that some element of
cross-subsidisation must continue. But the
result of any such action is a higher than
optimal price for those provided services
on a viable basis and a lower than optimal
volume for those receiving subsidised
services.
It is notable that the rural banking
system (consisting of the District Central
Cooperative BanksDCCBs and Regional
Rural Banks - RRBs) has not had to
follow interest rate regulation for over a
decade now. Yet, at no point has it felt free
to charge much more than the commercial
banks for the apparently more inclusive
services it provides. A study by M-CRIL in
2008-09 showed that the average yields of
DCCBs and RRBs were not significantly
more than the 10.5% average yields of
commercial banks (in 2007-08) despite
the RRBs having operating expense ratios
(OER) that were significantly higher (see
Figure). While DCCB operating expense
ratios were lower this was largely on account
of most origination expenses being borne
by the loss making Primary Agricultural
Cooperative Credit Societies (PACS). It
is apparent that the lower yields of the
EXECUTIVE SUMMARY
xv