Nilav is an NRI in US. Before migrating, he used to stay in Mumbai. He belongs to a small Gujarati village.
His relatives and antecedents have resided outside India as well for a few decades in the past. They now have repatriated to the village. Every month he transfers some money to India. The figure runs into a few lacs of INR. He has an account in a bank branch in the metro city where his company’s head office is. He also has an account in a bank in his native village. The question is does it really matter what choice he makes while picking up the transferee account?
On the face of it, it’s a trivial question; isn’t it? Does it even deserve to be pondered over? Let’s see..
The fundamental skeleton of a bank’s business is this – Borrow money from depositors in the form of savings/current/checking/time-bound deposits, lend this money to people seeking loans. Charge interest from people who’ve borrowed; retain a part of the interest as a profit, and pay the remaining interest back to the depositors.
We had asked two questions above. In quintessence, the existence or continuance of a bank is ensured if the answer is YES to two questions. One, if it has sources of funds which come in form of demand and time deposits. Two, if it has sufficient (and credible) demand for loans. Demand for loans is the pair of front wheels of the bank-wagon, which propel the wagon ahead. However, equally significant are the rear-wheels of source of funds without which the wagon just cannot move.
In the real world, it is impractical to have the web of banks so evenly woven that each bank has a supply of deposit funds equaling the demand for loans. As a consequence, there are inter-bank markets where banks surplus in deposits (when compared with their own loans) can lend to banks with overwhelming demand for advances. If you observe, following this arrangement, a bank can ensure its sustenance by fulfilling any one of the two quintessential conditions discussed above!
Given this information, say I establish a bank in a village lacking even a soupçon presence of banks. To perpetuate the operations of this bank, all I have to do is to have people there park their money in the bank or/and make them dream of something which could prompt them to borrow from the bank. If I fail to realize both of these, the bank in the village will have to shut shop very soon.
It is here that Nilav’s choice will make a difference. Let’s take an observational route to this situation.
As a snowballing effect of the exponential expansion of IT industry, a steep depreciation of rupee, and an erratic, fitful and mutable stock market behavior, there are thousands of people like Nilav who are awash with money and wish to park into risk-less trustworthy places. They have fulfilled their desires of building bungalows and owning expensive cars and have enough for holidaying abroad every year. As per their own individual choices, they are financially sound. The only abode where they would prefer their money to take refuge is a bank in their home-town. There is less apparent rationale to it, but that is what the reality is!)
Let’s think about it. When we migrate from our native to other town, don’t we still prefer stashing our savings at a place where our permanent address is? Of course we do and Nilav is no exception to it. Emigrants of previously unbanked villages are likely to stockpile money in the same villages if they are banked now. To translate this likelihood into certainty, higher interest rates in such banks may work as a subtle finishing touch.
As instances, Gujarat’s little Dharmaj village has over Rs 1000 crore in NRI deposits. Another tiny hamlet Baladia, having eight full-fledged branches of nationalized banks catering to just 1,292 households, boasts of bank deposits worth Rs 2,000 crore. With 7,630 households, bank deposits in Madhapar stand at Rs 5,000 crore. Kera village, home to 1,863 families, too has deposits of Rs 2,000 crore. Almost half of this is NRI money. The average deposits held per family is nearly a crore..!!
These occurrences are conspicuous because the figures are staggering. The reason is the percentage of people migrating to high earning jobs is more here. Banks here are offering higher interest rates as well. In villages in Punjab, Orissa and Andhra Pradesh too, similar practices are observed. No bonus points to guess that had these NRIs chosen to deposit their money elsewhere; the banks in villages had no option except to collapse as demand for loans is already not encouraging there.
Today, RRBs (Regional Rural Banks) face tremendous paucity of funds because in tier 4 geographies, people do not have surplus funds to park in banks. This is a key reason for instabilities in financial inclusion bandwagon. How do we expect the rural banks to sustain? As a result, the Nationalized Scheduled Commercial Bank branches there are either shut down or are consolidated with other branches to save fixed costs. Oh! But doing this exacerbates already pervasive financial exclusion. Trapped! Eventually, since these are all Public Sector Banks, government budget is used to ‘re-capitalize’ them. Lakhs of crores have been spent in the past to infuse capital in rural banks. And all this is just to make the rural banks sustain! Sustain, so that we can have people financially included, even if it causes budget deficits?
There has to be an alternative. There are a few corollaries from these observations. As Banking Regulators, we should understand that extending banking footprint means to have people getting involved on either asset or liability side of the bank rather than having passive accounts. To enhance ‘bank-activity’ in rural geographies, migration to urban (and subsequently foreign) places is also a link. Let’s not rush to discourage it as this could be a stage in the equilibrium process. A wise step could be to offer slightly higher rates to depositors in Tier 4 towns or to incentivize migrants to choose banks back home for long term savings to pedal their natural affinity, as discussed above. There are plenty of Nilavs whose expected tendencies and behaviors could be used to tap potential deposits. These are subtle aspects of human behavior, which could be intelligently leveraged to ensure subsistence of banks. Because, it is only when the bank there sustains, will the schemes of mass pension, life insurance, health insurance and subsidies reach the unbanked and so will serve the desired purpose.
As Fiscal Authorities, our focus needs to be on funds also along with offering cards and phone payments to tier 4 spaces. Let’s not miss to acknowledge that funds to a bank are like fuel to a vehicle. No doubt those marquee initiatives are needed; but actions on these simple sinews would add celerity and ease to connect things.
The bank-wagon needs fuel first to keep operating. So, let’s arrange the fuel before planning for fancy headlights. J