BANKING ON INCLUSION

Bankers are not a superstitious lot, but it must be galling for them to find that they may end the year with not enough liquidity. The Reserve Bank of India had, in its recent mid-term review, addressed this problem with measures like open market operations to buy securities worth Rs 48,000 crore in four lots. Meanwhile, banks have had to use the repo window to borrow record sums from the RBI on a daily basis. Liquidity shortage is, however, not the main problem. As 2010 draws to a close, confusing signals emanating from policy players may already be leaving bankers with a hangover.

Less than a month ago, the RBI Governor, Dr D. Subbarao, threw a googly at the Bankers' Conference by suggesting banks raise deposit rates and lower lending rates. Financial inclusion, he felt, deserved this measure where banks forego a portion of their net interest margin for a social cause, a sacrifice that may not be necessary if banks were to reduce transaction costs and move towards fee-based services. Many public sector banks have been following their private counterparts towards a more contemporary organisational structure (against heavy odds, it might be noted) and a business model based on fee incomes, but such shifts sit uneasily on the socially-oriented model for lending that continues to be the bread and butter of all Indian banks. Unsurprisingly, some banks have turned a deaf ear and are raising both rates to cover the enhanced cost of funds. As if that were not enough, now, the Finance Minister, Mr Pranab Mukherjee, would like the top brass of public sector banks to visit at least one per cent of the villages allotted to them under the financial inclusion plans being drawn up by the Ministry and the RBI. Chairmen, Managing Directors and Executive Directors must get a feel of the grass to make sure that financial inclusion does not remain on paper. Just how this would help realise the objectives of inclusion is unclear; exclusion is not the result of the failure of top executives to smell the earth.

Public sector bankers are likely to wake up in the New Year to the mantra of financial inclusion ringing ever so loud. As they grope with the organisational structure that will be required for village-wise monthly collation of inclusion, among others, the problems of liquidity will appear trifling.

SOURCE: http://www.thehindubusinessline.com/2010/12/23/stories/2010122350160800.htm