foreword
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the scheme was launched, nearly 70 million accounts were opened; however, as in the past, 50 million of these had
no transactions. The campaign is ambitious where an overdraft facility of Rs 5,000 will be provided to every account,
besides an accident insurance cover of Rs 1,00,000.
While it is too early to write off the new campaign as another good intent gone awry, the government will need
to substantially strengthen and integrate the institutional architecture, announce breakthrough policies, learn from
efficient private sector experiences, and fully leverage technology solutions. Leaving it to the banking infrastructure
alone may not yield results. Digitizing the financial inclusion space and bringing in more players to facilitate ease of
transactions should be encouraged. Expanding PMJDY to cooperative banks, which have connected the Core Banking
System, is a positive step. The RBI’s release of Draft Guidelines for small finance banks and payments banks as a
part of introducing differentiated banking in the country is a welcome step. While small finance banks will help in
credit outreach, payments banks will help fill gaps in access to formal payments and remittances system. Besides,
the experiences and the outreach of SHGs and MFIs also needs to be integrated into the scheme of things. Business
Correspondents will need to be made more viable and strong emphasis on financial literacy is required before the new
clients recognize the need and significance of banking. Much to be fixed, before we start to see real outcomes.
On the two channels, viz. SBLP and MFIs, without being considered formally as a part of the government’s financial
inclusion scheme, the landscape seems to be changing. On the MFIs front, perhaps the biggest news is that Bandhan
was awarded a commercial bank license; perhaps even bigger than SKS going in for an IPO. The regulator preferred
Bandhan to several corporate houses that had applied for a bank license, clearly recognizing their professional prowess
in financial management and providing the channel greater legitimacy as a relevant actor in the financial value chain.
This also provides a road map for the next level evolution of MFIs. Towards their possible future role in financial inclu-
sion, NBFC-MFIs were also allowed by the regulator to act as bank BCs, a long-standing demand of the MFIs. How
the NBFC-MFIs will use this new opportunity is yet to be fully revealed. The announcement by the Reserve Bank on
differentiated banking licenses and issuing draft guidelines for small finance banks and payments banks is likely to have
far-reaching influence on the future growth of the industry. The Raghuram Rajan Committee of 2009 had first hinted
at the idea of creating small finance banks towards advancing financial inclusion, later reiterated by the Nachiket Mor
Committee. Recently, the Governor informed that MFIs were most suited to apply for the small finance bank and that
the final guidelines would take care of aberrations that might deter them from applying for the small bank licenses.
Although this provides a huge opportunity particularly for the large MFIs, several are in a quandary of transforming
into banks given the profitable, well-oiled MFI lending methodology. In the meanwhile, the sector has fully recovered
with funding to the sector grew by almost 50 per cent, the glp grew by almost 35 per cent and the client base increased
by over 20 per cent compared to the previous FY. The scenario is only expected to improve.
On the other hand, the SHG lending has witnessed new challenges. In recent years the ‘movement’ has witnessed
some kind of stagnation and slump. Besides mounting delinquencies, most banks are focusing on meeting their strin-
gent targets under the new government’s overwhelming Jan-Dhan Yojana targets. On a CAGR basis, the growth rate
has been slowing down over the last four years. With increasing defaults, given the high transaction costs, with shift
of focus on PMJDY targets and to meet priority sector lending, there is a seemingly evident greater interest in MFI
lending and, as a consequence, the pace of SBLP may further flounder unless quick creative solutions are designed.
With 4.2 million SHGs linked to banks to the extent of Rs 430 billion, it is indeed critical to set it back on track.
NABARD has to recoup its leadership role in steering the programme’s future growth. At the outset, it needs to
strongly lobby for an appropriate important role for SHGs in the financial inclusion scheme of things. NABARD
needs to better coordinate with NRLM for better convergence. If bulk of the current NPAs are generated from loans
to SGSY groups, matters need to be taken up with the policymakers as wells as with the regulator. I’m aware of many
banks lending to SHGs, but make sure that they are not SGSY groups! NABARD has been very conservative in giving
a serious look at SHG promotion costs, the implication of which is that SHG promotion is done by small low-capacity
NGOs, which typically results in poor quality SHGs, which are highly prone to defaulting. NABARD needs to look
at a long-term SHG promotion and nurturing plan and make adequate investments in SHPIs, beyond just the first
