Subscribe to RSSTHe Week
Construction for nat'l games to finish in 4 days
Do not entertain illegal Tibetans, says Chinese expert on Tibetology
SRC report to be first discussed in thematic committee
Gupta repeats Madhes may break ties with Kathmandu
SC stays Gachchhadar's citizenship fiat
Govt to bust brokers at Kalimati veg market
Govt, Maoists to be blamed if country blacklisted: UML
My Republica e-Paper.
Phalano by Rajesh KC
Cartoon Archive »  

Republica, Nagarik News
  Daily News
  Photo Gallery
  UCPN (Maoist) 6th Plenum
  Govt Policies & Programs
  Budget 2009/10 Speech

Low o
High o
Sunrise N/A
Sunset N/A
  Realizing inclusive banking  


Inclusive banking—a term that has gained towering prominence today—has captured the interest not only of the central bankers of the country but of other policymakers as well, perhaps because it essentially refers to the delivery of financial services at affordable price to the economically-challenged population in any division. The recently issued Monetary Policy explicitly referred to the need for Nepali banking industry to work toward enhancing financial inclusion in the country. Financial inclusion is considered as the most crucial factor for overall growth in the interior rural areas.

The banking sector is the most important financial intermediary for mobilization of savings leading to investments that drives growth, and it plays a decisive role in attaining the economic objectives of any nation. It is thus more economically appropriate and significant in a country like Nepal, owing to the fact that a large proportion of the rural to pastoral population live in areas so distanced that they are, in general, untouched by formal banking activities and development. Inclusive banking as such unalterably holds true in our context.

The challenges of achieving this inclusive growth can be met by policies that encourage easier and affordable access to financial services in the country. Until now, Nepal Rastra Bank (NRB) has adopted a two-pronged strategy to ensure that banks participate in the economic prosperity of all sections of society. It is done, firstly, by easing the expansion of the banks and their branches and, secondly, by mandatory lending to priority/ deprived sectors. NRB has relaxed the norms of branch expansion to encourage banks to go to technology-deprived areas. This distribution of the branches is managed by granting licenses for opening new branches with a stipulation that for every two branches opened outside Kathmandu Valley (one of which shall be within the 30 districts listed by NRB), one new branch is allowed to be opened in Kathmandu valley area, which are considered more profitable. Initially, NRB decided that banks which fulfilled stipulated criterion and standard didn’t have to take prior permission from it—a decision that has now been reverted by the recent Monetary Policy. This provision, to some extent, facilitates more branches to open in the country.

As per NRB data as of mid-July 2010, 966 branches of commercial banks were operating around the country compared to 752 a year ago. However, the disparity in the distribution of the bank branches, thereby access of the general public to formal banking system, exist even now as less than 7 percent of commercial bank branches—most of which are branches of state-owned banks—are in rural districts.

On the lending side, 3 percent of advances have to be made in the priority sector—directly or through microfinance institutions—which are earmarked for agricultural lending as well as for others, including housing, self-employed or household enterprises, small and medium enterprises and so on. These mandated provisions have certainly been responsible for the flow of credit to the sections of societies that are pretty far from financial affluence. Additionally, NRB has introduced some sort of mobile/branchless banking concept to reach to masses at a low cost. Besides that, there are some other “carrot and stick” policy provisions for banking and financial institutions, supposedly intended on enhancing their participation on the promotion of inclusive banking through increasing access to formal financial system.
Banks perceive priority sector lending as a sort of annual tax that they must pay to do business as they are not equipped with the right products, procedures, and lending technologies to serve small businesses profitably.

Though NRB and other banks have made significant strides in all areas of their performance, vast segments of population, particularly the underprivileged, are yet to be covered. It is in this context that all efforts are required to bring about financial inclusion and bring those segments of population into the mainstream of life. One cannot conclude that the initiatives undertaken by the government and the NRB to help the downtrodden have not brought any results. However, the fact remains that years of effort and policymaking and financial assistance extended through the various specified programs could have achieved much more.

Any effort to expand access should address sustainability issues among providers of financial services—that is, help them profitably reach their desired market segments, rather than require them to lend to specific sectors or open branches in specific areas. Priority sector lending, which seeks to increase access to credit by small businesses, is considered a burden by banks. Almost 40 years after such lending was introduced, banks are reducing it as NRB lowers requirements for it. Banks perceive priority sector lending as a sort of annual tax that they must pay to do business as they are not equipped with the right products, procedures, and lending technologies to serve small businesses profitably.

Here, it is necessary for the policymakers from banks, including NRB, to realize that “inclusive growth” is more than just the benefits of growth being distributed equitably and evenly; it is the participation of all sections and regions of society in the growth story and reaping the benefits of growth. Bankers must see ‘inclusive’ banking as an opportunity rather than an irksome dimension of regulatory compliance. This would not only enable banks to expand their market share but expand the overall market, in the process of tapping customers from the lower income segments.

If we look at the population pyramid, it is clear that there is enormous market potential at its base as amply demonstrated by Late Prof C K Prahalad in his book “Fortune at the Bottom of the Pyramid”. Products and services need to be developed in a way that they are adapted to the needs of the majority at affordable prices. It is possible to make attractive commercial profits in addition to obtaining social returns, but this requires a step forward in traditional strategies. With ever increasing competition in the industry and narrowing spread, some banks have announced financing and banking services to small and micro enterprises and low income families, accompanied by an expansion of the frontier of the micro finance products; savings accounts and remittances. However, we are yet to see the strategic shift on their processes and procedures toward services for the poor in the real sense.

An important lesson we have to learn here is that a new business model of financial inclusion is essential and that the model needs to reach the needy not only at a lower cost but also through a less cumbersome process. A voluntary participation of banking sector rather than forces is vital for overall success of this model. Thus, the focus on financial inclusion comes from the recognition that this can serve the interest of both society and the banking system. This can be attained only by making banking more inclusive through expanding the coverage of banking services by reaching the vast un-banked and under-banked population of the country with a whole new paradigm of growth strategy. With the collective effort from banks, regulators, the government, more rural poor can be brought within the ambit of financial inclusion.

If all stakeholders realize that “inclusive banking” is good business, regulatory and policy frameworks that promote accessibility and responsible banking with new rural banking model can definitely lead to the desired outcomes of inclusive growth.

Writer is with the Business Development Department of Nepal SBI Bank Limited.

Published on 2010-09-14 01:00:21
# # Share [Slashdot] [Digg] [Reddit] [] [Facebook] [Technorati] [Google] [StumbleUpon]



Please give your full name while posting your comments. This is not to stifle the free flow of comments but your full name will enable us to print the comments in our newspaper.


Realizing Inclusive Banking
Comment on this news #
Related News
More on Opinion
About us  |  Contact us  |  Advertise with us  |  Career   |  Terms of use  |  Privacy policy
Copyright © Nepal Republic Media Pvt. Ltd. 2008-10.