the bandhan experiment

early in april, the rbi surprised most financial sector watchers by granting a banking license to bandhan, a microlender with most of its operations in eastern india. in a story out today, my colleague atmadip and i take a closer look at this decision. and say that this is a high stakes experiment — for the rbi, which is looking for fresh ideas on how to deepen financial inclusion; for the mfis, which, given rising competition from banks, mobile companies and banking correspondents, are looking for new ways to survive and grow; and for bandhan itself, which has to pupate into a bank without losing its quick response times, but while guarding against mis-selling of financial products to its vulnerable client-base.

Yet more stand behind tiny counters and sell nimbu paani or bhelBSE -0.80 %. The nature of enterprise is local, small and on the edge of subsistence.


on the nachiket mor committee’s financial inclusion report…

Last week, when the Nachiket Mor committee released its report on financial inclusion, it created a flutter. It was ambitious. In a country which is still struggling to provide banking facilities to most of its poorer citizens, the committee set aggressive targets. By January 1, 2016, it said, every Indian over 18 should have a full-service bank account. By then, the country should also have such a thick distribution of electronic payment access points – where people can withdraw, deposit or transfer money – that every citizen should be within a 15 minute walking distance from one.

Every low income household and small business should also have “convenient” access to formally regulated companies which provide financial products for credit, savings and investments, insurance and risk mitigation. It introduced the notion of ‘suitability’. “Each low-income household and small-business would have a legally protected right to be offered only ―suitable financial services. While the customer will be required to give informed consent, she will have the right to seek legal redress if she feels that due process to establish ‘Suitability’ was not followed or that there was gross negligence.”

As a roadmap towards these goals, the committee made a slew of wide-ranging recommendations. It suggested the creation of new banking models, it suggested new regulatory structures, it argued for the elimination of the statutory liquidity ratio for existing banks, a convergence of rules for banks and NBFCs…

The report was received with some incredulity. Says a rural finance practitioner, “What India could not acheive in 60 years, the Mor committee wants to acheive in two years.”

To understand what the Mor Committee report can mean for India’s unbanked, you have to study five smaller questions. For the vision statement presented by the Mor Committee – or, to take its full title, the “Committee on Comprehensive Financial Services for Small Business and Low Income Households” — to come true, a set of building blocks have to fall in place. Among them: Aadhaar; a new set of financial organisations; the notion of responsible marketing of financial products; a new credit push; and a new model for regulation and oversight.

The full story, here. Also see my colleague Vidhya Sivaramakrishnan’s interview with Mor for this story, here.

the ‘society’ bank at mardi

Over the years, the ‘Society’ bank has come to occupy a specific niche in Mardi, a village of about 7,000 people near Sholapur, Maharashtra.

Its loans are smaller than those given by the Bank of Baroda branch in the village. But it is faster at lending to small farmers. Says Rashid Gulab Sheikh, a farmer in his late fifties, “If you are a two acre farmer, a loan from the bank (Bank of Baroda) will take 2-3 months to come. The Society gives the loans in 8 days.”

Mardi’s ‘Society’ Bank is a Primary Agricultural Cooperative Society (PACS). Low-profile cogs in India’s agricultural credit machinery, these are the field outposts of the three-tiered cooperative society lending structure that currently accounts for 17% of all agricultural loans.

Over the last few months, PACS have been seeing a pitched battle over their future. This January, the report of an RBI-appointed committee to study the functioning of the cooperative lending structure recommended they be converted into banking correspondents for District Credit Cooperative Banks – the second tier of the cooperative society lending structure. Once the RBI accepted the recommendation, Nabard, whose chairman Prakash Bakshi was chaired the RBI committee, issued operational guidelines.

Such a transition, says the rural lending institution, is the only way to save the PACS. However, opponents of the plan, like IIM Bangalore professor and rural finance expert MS Sriram say the idea will kill the PACS, not save them.

The End of the Silly Common Banking Correspondent Model?

since may this year, i have been tracking a plan from the department of financial services to split india into 20 clusters, and to appoint a common banking correspondent company for all public sector banks operating in each cluster. it is a textbook case of policy adventurism. the department, a part of the finance ministry, has not paused to wonder whether putting one company in charge of all financial transactions of the poor — between the government and them, and amongst themselves — can result in that company developing monopolistic tendencies. something that banks themselves are deeply apprehensive about. strangely, alarm bells did not go off inside the department even when the auctions to appoint BCs started, and bids touched unexpectedly low levels. see this and this.

well. there is good news at the end of all that. as this story reports today…

The government is likely to shoot down the Department of Financial Services’ (DFS) plan to appoint common banking correspondent (BC) companies for transferring cash to poor people and replace it with a country-wide network of ‘micro ATMs’, as it seeks to finalise the last mile payment architecture for cash transfers.

In a meeting on Monday evening, Rural Development Minister Jairam Ramesh, UIDAI chairman Nandan Nilekani, and Planning Commission officials met Finance Minister P Chidambaram to share their reservations about the common banking correspondent model. An official who attended the meeting told ET that it was agreed in-principle to junk this model but a final decision will be taken by the Finance Minister.

In a SMS to ET, Ramesh confirmed the development. “The DFS model is now history. Women SHG, Ashas, anganwadi workers, post offices, teachers, kirana stores, fertiliser shops, etc, can now be BCs,” he said.

the government is now thinking of using micro-atms, as the nandan nilekani report on micropayments had suggested, to make cash transfers reach across the last mile to targeted beneficiaries. whether these will work or not is an open question as well. but that is another story. to be written after another set of field trips. for now, i am glad that this one cluster, one BC model might be on its way out.

In which the Banking Correspondent Auctions finally go below the psychological zero percent margin mark…

for a while now, i have been reporting on the never-ending happiness that is the finance ministry’s “one cluster, one BC” model — essentially, to split india into 20 clusters and then to have one common banking correspondent company for all public sector banks operating in each cluster. this company would then be the only conduit through which welfare programme monies (and cash transfers) would flow from banks to the poor pensioners, nrega workers, what have you.

for a while now, there has been some concern that entrusting such a vital role to one company would sooner or later result in it developing monopolistic tendencies. this concern has been deepening as one saw companies put in incredibly low bids to win clusters — for an industry which has been saying that a 2% margin is not enough, bids have ranged between 0.86% to 0.02 and 0.01%.

but now, there is something new under the sun. a company called seashore has emerged as the L1 bidder for Orissa after bidding minus 0.06%. these guys propose to pay the govt 6 paise for every rs 100 the company delivers unto poor households.

makes sense?


read the story, jointly written by my colleagues nageshwar, atmadip and me.

another update on the common BC auctions

close to four months after the finance ministry decided to split the country into 20 clusters and to appoint a common banking correspondent for all public sector banks in each cluster, how are things coming along?

the latest update, here.

the banking correspondent auctions resume

after a brief hiatus, the reverse auctions to choose common banking correspondents (see innumerable posts below) have resumed. the latest update.