Skip to main content

Urban-centric banking model a recipe for disaster when used in villages


By Moin Qazi*
Rural banking has come a long way from the days when bankers had their first brush with rural culture. Bankers are now financial anthropologists, and many of them are playing a missionary role in transforming rural societies. However, challenges continue to persist. When rural banking took its baby steps, villagers were shy of loans because they were afraid they would not be able to repay. The situation today is quite the opposite. People have a savage appetite for loans but, unlike their forebears, they have lost that pristine morality which equated default of loans with the guilt of shame. Banks are piling up mountains of sour loans and governments are brushing them off with buckets of precious public money.
Rural banking has been a great hurdle race ever since the government nationalised major commercial banks and mandated them to focus their thrust on villages. India Gandhi nationalised private banks with a deposit base above Rs 50 crore in 1969 “in order to ensure funding for the poor”. The official commandment to public banks was not just about barefoot banking but was a directive to run into unfamiliar terrains to punch their flag posts. The expectations were that this would bring about both an economic and social revolution by shovelling cheap money into farms. The players were untrained and unwilling participants in the marathon. Their captains were equally unprepared.
But the umpire, the Reserve Bank of India, was stubborn and unrelenting. He brought more players into the race and changed the rules of the game many times. At some stages, it appeared as if he himself had lost interest in the race. But the race continues, proceeding in different directions. The roadmap of financial sector reforms bypassed rural banking time and again despite repeated concerns from developments pundits. Meanwhile, the reconciled barefoot bankers continued to walk amidst the debris of the populist programmes. The official emphasis on financial inclusion keeps re-emerging in policy documents but little earnestness is shown by bankers in pursuing it on account of a plethora of constraints.
Apart from inexhaustible energy, rural bankers needed craft, diplomacy, persuasion and only occasionally the sternness of rules and laws. it also called for something greater that all these–what can only call an earnest, transparent sincerity, born not out of years of the ideals that one brings from one’s formative years—the atmosphere in which one grew in one’s family, and the conditioning that was an almost unconscious part of one’s time in school and college.
The eighties of the last century saw an unplanned and indiscriminate expansion of bank branches most of which later became an economic deadweight. Between 1977 and 1990, the Reserve Bank of India mandated that a commercial bank could open a new branch in a location that already had bank branches, only if it opened four in locations with no branches. This regulation was part of a social banking program that tried to expand access to financial services in rural areas.
The additional burden arising out of the mass opening of rural bank branches adversely affected the resilience and viability of banks. The extension of commercial bank branches was inspired by the need to fill credit gaps in the rural economy which the uneven and inadequate development of the cooperative movement had left. The politicians believe banks can bring economic revolution through rural credit, which is just like expecting a midwife to deliver a baby. In a developing country, it is not enough just to provide credit for production. Production itself must be increased with the adoption of improved technology.
The branches mushroomed and there was an exponential increase of rural branches of banks. Villages began to be courted by bankers. These phenomena gave rise to a popular adage: “A village could be known as uninhabitable only if it did not have a branch of a bank.” Such was the explosion of rural banking. The depth and outreach of the banking network in the late seventies grew at a sizzling pace on account of tough government mandates. This was at a time when the transport and communication infrastructure in the country was abysmally weak, unlike today when mobile phones, email, SMS and Skype enable us to communicate anywhere anytime.
Financial market imperfections that limit access to finance are key in most development programmes. Lack of access to finance is often the critical mechanism behind both persistent income inequality and slow economic growth. Hence financial sector reforms that promote broader access to financial services should be at the core of the development agenda.
Providing better financial access to the non-poor micro and small entrepreneurs can have a strongly favourable indirect effect on the poor. Spillover effects of financial developments are likely to be significant. Hence, to promote pro-poor growth, it is essential to broaden the focus of attention of finance for improving access for all who are excluded.
While the positive social and economic impacts of nationalisation were quite evident, the experiment was also an eye-opening lesson in the disaster that mindless bureaucratic programmes can become. .Rural banking in India has suffered severely on account of populist measures of the State. What the populist leaders wanted was that the cash spigots be turned on permanently. .The most fundamental canons and nostrums of banking were thrown to the wind by the vote hungry politicians .banks were saddled with mountains of sour loans whose stink leached the entire rural credit system which bled inexorably.
Bleeding the banks to aggrandize the rich farmers had become a favourite sport of the politicians, who had been using banks as cash spigots for populist programmes. Most rural branches were hobbled by a legacy of political interference. The greater part of the last decade of the twentieth century was spent by banks in cleaning their branches of the avalanche of bad loans in which they had been buried. The years of sloppy lending had left a vast hole in the balance sheets of rural banks.
Most development programmes are a grim reminder of how mechanically trying to meet targets can completely undermine the integrity of a veritable economic and social revolution to such an extent that a counter-revolution can be set into motion. But we refuse to learn lessons, particularly because populist politicians consider it a sure way to burnish their electoral fortunes.
This is however not to obscure the cutting edge role the public banks have played n financial inclusion. These banks have been the backbone of socioeconomic agenda for the government .In any particular rural area, the role of a public is not confined to banking but encompasses a more holistic developmental agenda. They are the one-stop shop for all financial needs of the local rural populace including insurance, financial literacy, remittance amongst others.
It was this emphasis on those excluded from the formal financial stream that led to a slew of measures in the field of finance and drove so many bankers into the arena of the battle against poverty. When I started my banking career, many of the developing-country practitioners with whom we worked at the time put their finger on the key questions arising out of the conflict between those advocating market-led solutions for fighting poverty and those who believed that sustained grants and aids from the State were absolutely essential for combating poverty.
The latter school believed in the perennial extension of social safety nets. There was a plethora of baffling questions that confronted planners, a section of which felt that subsidies were distorting the economic climate and retarding the efforts of the poor for fighting poverty. Some of the pertinent questions were directed mostly at the relevance of the State’s continued aid to poverty alleviation programmes. When and where is intervention at the bottom end of the financial market justified? Of what kind: direct intervention, subsidy, regulation or something else?
The literature of that time, which consisted more of polemic and counter-polemic than of empirical investigation, did not answer all these questions. All we could do was to get a flavour of the aggressive debate in the hope that it might stimulate us to forge solutions that might at least have validity within our own local working environment.
As in other areas of development, the use of public funds is easy to justify in the interest of improving access and thereby promoting pro-poor growth. Such subsidies, of course, need to be evaluated against the many alternative uses of the donor or scarce public funds involved, not least of which are alternative subsidies to meet education, health, and other priority needs for the poor themselves. In practice, such a cost-benefit calculation is rarely made. Indeed, the scale of subsidy is often unmeasured.
But an even more serious problem is the possible chilling effect of subsidies on the commercial provision of competing and potentially better services to the poor. Subsidizing finance has severely undermined the motivation and incentive for market-driven financial firms to innovate and deliver.
The assumptions and suppositions on which nationalization of banks was premised didn’t hold water. Delivering development is essentially a government’s job. Bankers were just expected to be financial midwives but were finally entrusted with the task of birthing development. Instead of writing off loans, the government should funnel that money into infrastructural development and allow banks to do their job with professionalism. The new paradigm must recognize the boundaries that separate banking and government.
Similarly, we have to have a rural-centric bank model. The present urban-centric model has shown that it is a recipe for disaster when used in villages. Rural areas have special characteristics, local nature and local needs. We need to hire local people, need to understand local needs. The whole model has to be driven by high-grade technology and a few number of simple products that can be tailored to local needs. Let us hope that the wisdom gleaned from our learning is harnessed towards the right destination.

*Development expert

Comments

TRENDING

Constitution day makes us remember and rethink the values that India stands for

By Dr. Kapilendra Das*  India, also known as Bharat, was liberated from British rule and gained Independence on August 15, 1947. So every year on 15th August we celebrate Independence Day throughout the country. The Indians felt the taste of freedom, but there were no rules and regulations to govern the country for which British rules were effective up to January 25, 1950. To govern India, the draft constitution was prepared by the Drafting Committee which was published in January 1948, and the same was finally adopted by the Constituent Assembly on 26 November 1949, the day of an important landmark in India’s journey as an independent, Sovereign, Socialist, Secular, Democratic, Republic. The constitution so adopted came into force on 26 January 1950. To memorize 26 January, every year we observe Republic Day throughout India. To mark rethinking and remembrance of the day of adoption of the constitution of India, 26 November has been celebrating as “Constituti

Integrating biodiversity for poverty removal still not binding for this UN body

Reacting to a statement of the executive secretary of the Convention on Biological Diversity ( CBD ), United Nations, Elizabeth Maruma Mrema, on the occasion of the International Day for the Eradication of Poverty, which fell on October 17, well-known Thiruvananthapuram-based ecologist S Faizi has objected to the CBD’s plan for “effective integration of biodiversity for poverty eradication”. *** I compliment you for issuing this statement . However, I am disappointed to see that the CBD COP's output on poverty and biodiversity, namely the Chennai Guidance is not even referred to in your statement, particularly so since the 12th COP has asked the Executive Secretary to "continue the work requested by the Conference of the Parties in decisions X/6 and XI/22, for the effective integration of biodiversity for poverty eradication and development, taking into account also the related decisions of the Conference of the Parties at its twelfth meeting" and to promote the Chennai

Seventh most vulnerable nation, effects of climate change can be seen in Bangladesh

Mashrur Siddique Bhuiyan*  From November 6–18, 2022, Sharm el-Sheikh, Egypt is hosting the 27th Conference of Parties (COP27) of the United Nations Framework Convention on Climate Change. This two-week climate conference is critical for the globe because it occurs at a time when nations are coping with a global energy crisis, the conflict in Ukraine, rising inflation rates, and dwindling funding for climate adaptation. It also has great significance for Bangladesh, as the country's ability to maintain its economic growth depends on raising the necessary finances for urgent climate action and mitigation. This year’s theme is "Delivering for People and the Planet," which aims to hasten global climate action by lowering greenhouse gas emissions, fostering resilience and preparing for climate change's unavoidable effects, and increasing the flow of climate finance to developing nations. The goals of COP27 are based on the outcomes of COP21, which was held in Paris in 2015

Unsung, tens of Morbi youth of local fishing community saved many, many lives

By Rajiv Shah  It was indeed a treat to listen to Bhavik Raja, who spoke at a meeting of the Movement for Secular Democracy the other day in Ahmedabad. Speaking in chaste Gujarati, Raja recalled his childhood days in Mobi when he and his friends would often go to the town's Jhulto Pul (Hanging Bridge) in free time. I listened to him online. The bridge, which should have been given a heritage status, was handed over to the owners of a watch-making tycoon for repair. The repair was carried out so shoddily that it broke down in less than a week after it was opened for general public, leading to the death of more than 140 persons, many of them children. Raja, who formed a group of three-person activists' team on a fact-finding mission to Mobi, said, what isn't taken note of is how tens of youth, belonging to the local Muslim fishing community, jumped into the river and saved many, many lives. It's a marshy river, and to navigate in there is an extremely difficult exercise.

Zakir Naik tumult, Catholic Church power abuse: will Anwar Ibrahim save Malaysia?

Anwar Ibrahim By Jay Ihsan*  Anwar Ibrahim, a hardcore reformist who took a punch to his eye in 1998 from then inspector-general of police, Rahim Noor, has finally been given the mandate by Malaysians to serve as the nation's 10th prime minister. Anwar knows too well the burden of staying true to both trust and faith the people have in him requires every once of commitment and dedication. The question is will he be apologetic for his transgressions enroute to "rebuilding" Malaysia? In his overzealousness to get the job done, Anwar, 75, needs to safeguard every bit of gumption to address prickling issues plaguing the safety of the nation especially those involving communal sensitivities. For one, dare Anwar get rid of terrorist hate preacher and fugitive Zakir Naik for inciting religious unrest in Malaysia? In November 2016, India’s counter-terrorism agency filed an official complaint against Naik, holding him responsible for promoting religious hatred and unlawful activi

Ukraine war revitalizes silent competition between China and Russia in Central Asia

By John P. Ruehl  At the recent Commonwealth for Independent States (CIS) summit held on October 14 in Astana, Kazakhstan, Tajik President Emomali Rahmon expressed previously inconceivable remarks. His public admonishment of Russian President Vladimir Putin to treat Central Asian states with more respect showed the growing confidence of Central Asian leaders amid Russia’s embroilment in Ukraine and China’s expanding regional influence. After coming under Russian imperial rule in the 18th and 19th centuries , five Central Asian states—Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan— emerged independent from the Soviet Union in 1991. While these countries remained heavily dependent on Russia for security, economic, and diplomatic support, China saw an opportunity in their vast resources and potential to facilitate trade across Eurasia. Chinese-backed development and commerce increased after the Soviet collapse and expanded further after the launch of China’s Belt an

Adequate attention not paid on changing human life to realize climate change aim

By Bharat Dogra  Climate change is one of the biggest challenges of our times. It has to be checked as a matter of highest priority. Despite this adequate attention has not been given to how human life must change to realize this objective. We know that fossil fuels must be phased out and replaced by renewable energy. But is renewable energy capable of meeting the present day massive energy requirements, along with the increase taking place? Even if it is, what are the implications if renewable energy has to be scaled up to this level, and at such gigantic level won’t renewable energy also have very adverse consequences, although of a different kind? Such questions make the situation more complicated, but these have to be faced. So let us try to approach the issue in a somewhat different way. Since the daily consumption of various goods and utilities involves the use of fossil fuels in various ways, if all excessive, wasteful and harmful consumption can be given up, this will also lead

Much like earlier meetings, COP 27 fails to find real solution to overcome climate crisis

By NS Venkataraman* COP 27 in Egypt was organized with much fanfare and expectations, similar to COP 26 at Glasgow that was organised in 2021. While nothing significant was achieved in combating the climate crisis subsequent to the Glasgow Meet, one thought that COP 27 would be more productive and would find some real solutions to overcome the climate crisis. Leaders and representatives from most of the countries participated in the COP 27 including the President of USA, Prime Minister of UK and so many others. Cosmetic speeches were made by the leaders, committing themselves to save the world from global warming and noxious emissions. Finally, resolutions would be adopted after representatives of all countries put their heads together . With no tangible agreement about the fundamental issues, the resolutions would inevitably end up as face saving documents. During COP 27, the UAE President clearly said that the UAE would not reduce production of crude oil and natural gas. In t

Bangladesh to import diesel from India: Win-win situation amidst economic turmoil?

Kamal Uddin Mazumder*  Bangladesh and India had been sharing friendly and warm relations since 1971. Both of the countries have been kith and kin through crisis moments. Bangladesh has witnessed India’s support from the liberation war to the Covid-19 pandemic. As now the world is facing the repercussions of the pandemic and the Russia-Ukraine war through the economic crisis and the energy crisis, India is still with Bangladesh through a cooperative framework. The government of Bangladesh had decided to cut down its fuel consumption to keep up with the global energy crisis. It was necessary to import fuel at the cheapest possible rate to mitigate the crisis. Some talks had been initiated with countries like Saudi Arabia, Malaysia, and Brunei but India came forward first. The geographical proximity and the longest shared border had ushered multidimensional ways of cooperation and collaboration in many areas. The import of diesel from India through the pipeline is one of the prime example

Maldives migrants' death: Govt bodies haven't done enough for workers' safety, security

By Kirity Roy*  We have been notified by the media that a hazardous fire, which erupted in a cramped neighborhood of Maldivian capital Male, has killed 10 migrant workers including 9 Indians. We are much aggrieved by this incident, and sending our heartfelt condolences to the families of the victims. Many are missing. Almost half the population in the Maldivian capital constitutes of migrant workers, and out of them many are Indians. During the COVID-19 pandemic it was reported by many media outlets that due to the cramped and unsuitable living conditions, the disease spread more rapidly among the foreign workers than anywhere else in the country. This brought the light upon the serious housing problem for the migrant workers in the country. The current incident shows that the Government bodies have not done enough to ensure safety and security for the workers. While the United Nations have established the rights of the Migrant workers through the International Convention on the Prot