On Wednesday (January 9), the RBI panel, headed by Nachiket Mor, suggested a new set of banks for financial inclusion. It also sought universal electronic bank account for all adult Indian citizens by January 2016.  Professor Charan Singh and Professor M S Sriram debate the idea of setting up payments banks.

In India, Asia's third largest economy, where about 40 per cent of the population still do not have access to formal financial services, would you say the recommendation of the RBI panel that a special category of banks, called payment banks (PB), be set up to widen the spread of payment services to small businesses and low-income households is useful and helpful?

Professor M S Sriram: I am not sure that the proposed model would provide solutions. If it was only accepting savings (as envisaged by the proposal of Payment Banks) an existing architecture of post offices already offers this service. Given that all the savings collected by the PBs are supposed to be parked in CRR and SLR securities, I wonder if there is a revenue model to compensate the savings of the poor and the excluded. As the report itself says elsewhere, currently there are not deposit products that give inflation adjusted return. So what would the PBs do?

Professor Charan Singh: I am not sure Payments Banks can be useful. The Payments Bank is a new bank and setting up a new bank is going to take a long time. For the new bank to start working and operating, and getting results is also going to take a long time. The time and cost in setting up such a bank is too high. The banking services that we should provide to the financially excluded should be wholesome. PBs are restrictive and limited. So, the proposal seems futile.

Can't existing institutions, like the Grameen banks, be used effectively to expand access to financial services to the poor? Why should new banks be opened for this purpose? India, we learn, has 57 Grameen banks with 17,000 branches across the country.

M S Sriram: While we should see what the new banks and new models bring to the table, we certainly should not reject the old models. I do not think the report rejects the existing institutions. Therefore anything that provides additionality, as envisaged by the report, should be welcomed.

Charan Singh: If you look at the history of financial inclusion in India, it goes back to 1955 when the State Bank of India was nationalized. It was done with the objective that banking services should be extended to rural areas - the objective was financial inclusion. If you look at nationalization of banks in 1969 and 1980, the objective again has been financial inclusion. Therefore financial inclusion is not a recent phenomenon.

I think the whole banking system has been geared to provide financial services to the poor and over the last decade, especially after the Rangarajan Committee report in 2008, the focus has been totally on financial inclusion. Even before that the Khan Committee report with the RBI had also focused on financial inclusion. So, it's not only the Grameen Banks, but the entire banking system with its network is targeted at helping the financially excluded.

Would you say we are rushing financial inclusion to failure? After making substantial progress in inclusion through mobile money for transfers, the world seems in a big rush to incorporate products and services that can go with the mobile phone. In the process, consumers may be getting inundated and confused. Do you think it is necessary to allow one phase to grow into the next? Would you say trying to do so many things at the same time to arrive at financial inclusion as a time based end, is a bit difficult?

M S Sriram: I am not so bothered about having audacious time frames and ambitious goals. We will at least try. We just need to ensure that we have adequate systems to deal with associated risks. The committee does not pay adequate attention to risks.

Charan Singh: We are doing a survey in Gubbi taluk in Tumkur district in the State of Karnataka on financial inclusion along with Professor Gopal Naik. We have surveyed the locals as well as different banking institutions that have been operating in the area. We found some factors that have not been recognized. For instance, we are still struggling with technology and connectivity issues in such areas where business correspondents have to climb a tree to get connection and make a phone call! That is our ground reality. We also found low number of transactions and volume in accounts that have already been opened in banks/ financial institutions in this area. There is also a high attrition rate of business correspondents. In the context of your question, most of the banking institutions that serve the poor and are in the forefront of financial inclusion told us that they are confused by contradictory instructions from different sources and at different points of time. For instance, there are different instructions from the Government and the RBI. No wonder financial inclusion remains elusive though the process was initiated as early as 1955.

What are your thoughts on the idea of setting up wholesale banks - to provide liquidity to other banks and financial institutions creating assets in the so-called priority sectors?

M S Sriram: Wholesale banks, specialized banks have been tried in the past and I believe they are a good idea if there is a specific niche (like small industries, agriculture) identified. The old DFIs have all morphed into universal banks and not remained DFIs any longer. It is an idea worth engaging with, but I do not see this alone doing anything drastic to the cause of inclusion.

Charan Singh: The idea of wholesale banks does not impress me. I have been a commercial banker, a central banker and have worked in the International Monetary Fund from 2009-2012 and I know that what we want is to spread banking habits among the general population and make banking services accessible to all. That focus will go missing if we opt for just wholesale banks to provide liquidity. This looks attractive but needs to be explored further. The Mor report says this proposal is an extension of the Rangarajan Committee report but I think it needs a re-look; otherwise the efforts made since 1955 will be defeated.

India is a large and geographically diverse country; there are many challenges in providing banking services in every part of the country. Tell us about challenges and how they can be met in the implementation of various financial inclusion schemes.

M S Sriram: The single largest challenge is in reaching the last mile. The rest of the architecture of back end IT backbone, inter-operability, payment and settlement systems, capital adequacy framework, risk mitigation frameworks, are all evolving and they will evolve even without a cause of financial inclusion. The challenge for the financial inclusion is not in the backbone architecture, but much more at the client interface level. The report has only polemics on this and no specifics.

Charan Singh: The challenges are many. In the survey in Gubbi, we are surprised to learn that borrowers treat loans from commercial banks as grants - a throwback from the infamous 'loan mela' days of the 1970's and 80's! All kinds of tactics are used to delay repayment even today. The moment there is a drought or a flood, they demand loan waiver. The psychology is bank loans ARE grants! The loan mela culture has not gone away even after a generation!

I don't agree with the Mor report's table on non-performing assets (NPAs) in the priority sector (the table says that the priority sector lending suffers from more NPAs than others). The financial stability report clearly says that the stressed assets are coming from aviation, mining, iron and steel, infrastructure and textiles, and medium and small enterprises do not have such high NPAs. It is the large borrowers accounting for more than 50 percent of credit causing a big rise in stress assets.

There are challenges in psychology of the people who must be brought into the banking fold. Second, in the precedence that has been set through loan melas and loan waivers needs to be addressed. The rise in NPAs is a very big challenge, and the branch manager is certainly not going to extend loans if s(he) fears that the community is not serious about repayment. India is so large and diverse a country that bank managers and loan officers are often transferred and the community seldom knows them personally as opposed to the close relationship it shares with the local money lender - a familiar face! The officer too has very little time to understand the people and their needs and prefers to play it safe till the next posting!

Financial inclusion in India and other developing countries is a relatively new area of research. Are there cross-country comparisons of financial inclusion based on empirical data?

M S Sriram: Yes, there are. But that is a totally different subject altogether.

Charan Singh: There are substantial amounts of cross-country comparisons of financial inclusion. You will be surprised to know that even in the UK and the US, there are substantial pockets that are financially excluded. The Nachiket Mor report mentions some, and does not discuss many cross-country comparisons.

Any other thoughts you have on the subject?

Charan Singh: The Mor report is elaborate and technically sound. It was prepared in three months. Well done to the team. It has some good points, especially on SLR. But that is not a new observation. We need substantial enactments to reach a situation where SLR is totally removed. But I think this is a report which is two generations ahead of its time! It seems to be based on a very advanced model. Saying that every adult in the country must have a bank account is ambitious to put it mildly. I am not sure how quickly that can be achieved. I am not even very sure if that is achievable and whether it is really necessary. That needs to be examined.

I also think the report should have had a more realistic time frame and that I would recommend the Rangarajan Committee report that had a national plan on financial inclusion was more realistic. The Mor report aiming to achieve  everything by January 2016 - as given in its vision - is too ambitious.

I think the report is very difficult to understand. If it has to be understood by commercial bankers at the grassroots and by policy makers, the report has to be far more readable. That could make the report less implementable.

I have a feeling that this report needs elaborate implementation plans - it calls for workshops across the country. The implementation plan needs to be across 8-10 years even to achieve what is partially given in the report.