The recent scandal at state-owned banks have captured the nation’s attention. Investors in public-sector banks have been caught on the wrong foot and their stock prices came crashing down. After the incident came to light, depositors at those banks reacted hastily by closing their savings and fixed deposit accounts in the fear that they may somehow lose their money.
The scandal coincides with a time the banking industry is dealing with historically high non-performing assets. This won’t be the last time for a system to be abused by unscrupulous persons. Then, the question to ask is this: what about people like us? Should we continue to pose faith in our banking infrastructure, or should we, like the panicked depositors liquidate the holdings? The truth is that banking presents the average India’s best chance for financial prosperity. Here’s why.
Aadhaar Will Lead to Fewer Frauds
With the ongoing efforts of digitizing finance and making it paperless, banks have initiated linking of Aadhaar to bank accounts. Not only does this help customers authenticate themselves remotely without having a face-to-face meeting with the bank, an Aadhaar-backed authentication also weeds out the possibility of documents being forged and accounts being fraudulently created. In the long run, this would help lower NPAs. With more genuine borrowers stepping forward, the banking industry would benefit.
Banking’s Greatest Leap Lies Ahead
India’s unbanked population is significantly large. By the most optimistic figures, there are around 70 crore people practicing in some form of regulated banking, be it via their local bank, post office, or mobile payments system. The challenge is also to bring the remaining 50-55 crore people under the ambit of the regulated banking system. The unbanked typically live in deep geographies where there will be a few bank branches and fewer banks, willing to reach them.
The unbanked need the benefits of banking too, for their own good. They will be helped only by the increasing penetration of internet and Aadhaar, which have increased the scope for democratisation of banking and financial services. Individuals in remote locations would be able to access banking services through their phones without having to visit a bank or ATM. By opening their accounts in a paperless way, eventually, they will learn to borrow from regulated lenders instead of going to loan sharks and insure themselves against death and disease. This is their best hope of making their flight out of poverty.
Banking Augments Household Income: RBI
According to the RBI report on household finance, the household income in India can be augmented by 10% without any external stimuli such as an increase in income. This report authored by Tarun Ramadorai, suggests that simple investment planning can fetch higher return without much risk.
For example, a household can earn 3.5-4 per cent per annum by putting money into savings account instead of buying gold, which is volatile. The household can augment its income by 4% by borrowing fund from regulated institutions instead of loan sharks, and by a further 2% by investing in health insurance instead of depleting its thin cash resources in a hospitalisation. Ultimately, banking is to a family’s financial benefit. And with paperless finance, crores of more Indians will benefit from it by being able to save, borrow and insure the right way without experiencing the paperwork and bureaucracy of offline banking.
The FRDI Bill is a Positive Move
In order to tackle the bad loans scenario, the Lok Sabha has tabled the FRDI Bill, primarily to allow stressed financial institutions to fail in a controlled manner. The Bill involves setting up of a corporation with members representing all financial regulators to assess the risk level of a financial firm. Based on the risk profile of a firm, the corporation would decide whether to intervene or not. The resolution mechanisms would include acquisitions/mergers, transfer of a sick entity’s liabilities and assets to a third party, liquidation and bail-in.
The government has reassured that the public sector banks, whose capital needs are taken care of by the government, would not have to eat into the depositors’ money to recover from any kind of bankruptcy. The bail-in method will be the last resort in case of private sector banks, wherein a merger and acquisition is not viable. A prior consent will be taken from the depositor while signing the deposit form.
Greater Safety Nets for Depositors
Currently, bank deposits in India are insured by the Deposit Insurance and Credit Guarantee Corporation up to an amount of Rs. 1 Lakh. This limit could go up with the replacement of the DIGC with the resolution corporation coming into place. Modernising the limit of Rs. 1 lakh would help insure the deposits of most retail customers.
The writer is CEO, BankBazaar.