Talk of 'financial inclusion'and many people will start yawning. 'Inclusive growth' is something of a buzzword now and many might be forgiven for supposing that it's one of those expresssions politicians love to include in their speeches. Makes growth look so much more respectable.
Yet, financial inclusion is not something to bracketed with, say, the employment guarantee scheme. I argue in my latest ET column that banks should go for it because it makes excellent commercial sense. Banks have a problem accessing deposits. Reaching out to under-banked areas would help them get low-cost, stable deposits. It would also help them make loans with higher yields than what they can charge corporates today.
Banks have had a cosy time these past few years because of the surge in liquidity and because savers have been wary of the capital market. On the asset side, top borrowers' demand for funds has diminished but banks have substituted them with retail assets. As a result, banks have been able to maintain their net interest margin, the difference between interest income and interest expense as a proportion of assets.
This run of luck won't continue. Banks' net interest margin is bound to come under pressure as savings seek out higher returns in the capital markets and elsewhere and the best borrowers continue to exit the banking system. Financial inclusion could be an excellent bet for banks in commercial terms.
The trick is to get banks to put systems in place to measure risk-adjusted return on capital (Raroc). Thanks to Basel II, banks will know the capital allocated, the denominator in Raroc. They need to get a handle on the numerator as well, the return adjusted for risk. When Raroc is measured and monitored, banks will get their pricing right. And the key to taking risks is largely pricing risk correctly. So, more than re-working priority sector loans, the RBI must push banks towards using Raroc.
Read my ET column.
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2 comments:
Financial inclusion (FI) is of course important, but the RBI should also push for ‘financial education’ (FE) which is much broader a concept than FI.
This is because:
1. Consumer rights protection: With a plethora of products, the semi urban and rural area customers may be vulnerable to wrong practices of banks (even in urban areas the ‘financial literacy’ may be low). There are already reports that some banks do not clearly inform about floating rate benchmarks, prepayment and reset clauses in retail home loans. Similar issues may (or rather, do) arise in case of selection of mutual funds, insurance etc.
2. FI is more from a supply side, FE can help create demand (Is it correct?)
The inability to read and interpret the ‘fine print’ creates information asymmetry between the bank (of financial institution in general) and the customer. This in itself creates risk.
India’s existing expertise in IT can be leveraged to deliver FE to the customer base spread across a huge geography. Even the help of NGOs may be solicited in this regard.
Paresh, I entirely agree that financial education (FE) is important as is protection of consumer rights. The two are not mutually exclusive; on the contrary, FE complements financial inclusion.
My impression is that the RBI has been mindful of this aspect, hence the insistence on banks making available a 'no frills' account that does not require a high minimum balance. Hence also the creation of a Banking Codes and Standards Board of India that will monitor whether banks are giving customers a fair deal.
-TTR
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