Loan Write-offs and Reduction in Rural Bank Branches Are Undermining Financial Inclusion in India

It appears that a major stock-taking and brainstorming is being organised by the Department of Financial Services (DFS) at the end of the month, where the country's banking leadership and heads of major public sector banks will be convened to assess the state of financial inclusion in the country. But if one is to go by the recent official statements (like this) from the DFS, one presumes that it will largely be a self-congratulatory gathering sidestepping some crucial questions that ought to be raised in any genuine review.

One of the major claims around inclusion is scripted around the ‘bank mitras’ or banking correspondents. They are said to have played a pivotal role over the last decade in taking formal banking services to the unbanked through the Jan Dhan Yojna along with direct benefit transfers. This, the government claims, has finally allowed for the financial inclusion of those in rural India.

But this obfuscates another part of the story, one that is grim. One that shows that the share of rural bank branches has seen a sharp reversal. While the nationalisation of banks had increased their share from a mere 18% in 1969 to close to 60% by the 1990s, it has once again been declining in recent years, reaching a mere 29%. 

Such reversals have consequences, ones that also tend to show up in the National Crime Records Bureau’s data of nearly 30 farmer suicides per day in recent years. As their wages stagnate and they are starved of credit, agricultural workers are worse off. But sadly such are the prescriptions of American firms like the Boston Consulting Group (BCG) that rejoice in the bitter pill of banking “reforms” being shoved down our throats – reforms that position profitability above people and “operational cost” above inclusivity.

The BCG folks in fact are superlative in their praise for the Enhanced Access & Service Excellence or EASE reforms adopted by the Modi government in 2018. And one of their recommendations has been to increase the number of services made available through bank mitras such that they achieve what they call “branch equivalence”. In other words, they want such bank mitras to be equivalent to bank branches and thereby pave the way for the further reduction of branches.

It of course serves the mantra of reducing the “cost of operation” that these reforms are obsessed about. But the question for the DFS ahead of the June-end meeting is, “at whose cost?”

Last month itself the Business Correspondent Resource Council, the industry body representing bank mitras, appealed to the Parliamentary Committee on Finance to review the remuneration of bank mitras. It also sought subsidies on their substantial infrastructure/equipment cost. There have been prior demands for fixed remuneration and also more dignity.

There are around 17.2 lakh business correspondents as per the RBI. They are literally the footsoldiers of banking in India today, with no permanency, job security or benefits. Many of them are not able to earn an adequate income and eventually become business correspondents for many banks, non-banking financial companies (NBFCs) and insurance companies. There are multiple reports of them taking unauthorised commissions from customers that remain beyond the pale of any regulation.

Footloose and uncertain about their own futures, their number in fact has fallen by 2.27 lakh in the last year. It’s a pity that they are expected to secure the future of financial inclusion.

Also read: Is RBI’s New Plan for Bad Loans Just Another Quick Fix?

What suffers in the process is decent access to affordable and safe credit in the rural countryside, which is turning into a preying field for usurious NBFCs, easy loan apps and gold finance companies.

Our field work in recent months in rural Tamil Nadu in fact corroborates the same, as we heard from women who in the absence of formal credit options were forced to borrow from gold finance companies and then were forced to take further loans to get back their mortgaged gold.

“In order to make provisions for the huge write-offs given to the big corporations, the banks are cutting overhead costs,” says Thomas Franco, former general secretary of the All India Bank Officers Confederation. “And that,” he adds, “is often taking the form of cutting down on branches and staff strength while relying on bank mitras.”

This brings us to the other major claim. Last December the DFS claimed that its “strategic interventions have significantly contributed to the reduction of non-performing assets (NPAs)” and that “gross NPAs have decreased from Rs 10.36 lakh crore in March 2018 to Rs 4. 75 lakh crore in March 2024”.

This too is attributed to the four ‘R’s of the EASE guidebook – recognition, resolution and recovery, recapitalisation, and reforms. The DFS claims that this reflects “the efficacy” of the Insolvency and Bankruptcy Code (IBC), the SARFAESI Act and the Prudential Framework for Resolution of Stressed Assets.

But the reality once again is far from such claims. In 2007-08, banks were able to recover about 50% of bad loans, but by 2015-16, this dropped to just 10%. As of 2023-24, the recovery rate had only slightly improved to 16.5%.

The IBC, which the Boston Consulting Group claims finally put “creditors in command”, is able to give back to banks only 23% of what they are owed. In many cases the banks in fact recover much less than they are owed – sometimes taking losses of up to 85%, often benefitting other corporates with haircuts. Out of 7,567 corporate insolvency cases, over 72% ended in liquidation (shutting down and selling assets), and only 28% were successfully resolved.

So, if that is the actual status of the four ‘R’s, the causes of concern can be captured in the two ‘W’s that the DFS doesn't talk about.

One, write offs. The amount of bad loans that banks had to write off – meaning they gave up trying to recover them – rose from Rs 11,600 crore in 2005-6 to Rs 4.87 lakh crore in 2023-24. In the last ten years, banks have written off Rs 16.35 lakh crore, but they have only recovered a small part of that.

And two, wilful defaulters. While Vijay Mallya gave sermons in a recent podcast, the opposition has accused the government of writing off Rs 87,000 crore owed by 50 wilful defaulters till 2024 citing official data.

This in turn has had a detrimental impact on financial inclusion, which we are sure will not be part of the DFS’s agenda in the upcoming meeting at the end of the month.

Also read: Narendra Modi's Mammoth Bank Heist Over the Last 10 Years

In official statements, the DFS takes credit for having facilitated “record credit disbursements” in the agriculture sector. It talks about increasing farm loans from Rs 8.45 lakh crore in FY 2014-15 to Rs 24.30 lakh crore in FY 2023-24.

But what it doesn’t say is the fact that sectoral credit growth, as per the RBI’s own data, has in fact halved from 20% to 10% in the course of just the last one year.

What it also hides is the fact that while overall credit may have increased, the share of public sector bank credit for farmers has gone down.

And this has a lot to do with the massive write offs and consequent provisions by the public sector banks, which has affected their operational profits. The ones who lose out are farmers and MSMEs who are forced to take loans at harsher terms and higher rates from the private sector. This has been achieved by tweaking the priority sector lending norms and by allowing for lending to corporate farmers.

The fact that the share of agricultural credit in rural branches has been falling while the same has been rising in urban areas and metro cities in recent years and that big-ticket loans have far outpaced small-ticket ones go on to show that the overall numbers hide crucial details.

The brainstorming on financial inclusion would be far more productive if it acknowledges that more than one in every five accounts under the flagship Jan Dhan Yojana have turned inoperative.

While the DFS fills pages about the role digital technologies have played in fostering financial inclusion, any fruitful discussion today also needs to acknowledge that as per the finance ministry’s own admission, just in the first ten months of FY 2024-25 the total amount involved in digital financial frauds reached Rs 4,245 crore, involving 2.4 million incidents. And that bank frauds (largely loan related) increased threefold last year.

Any fruitful discussion on financial inclusion ought to question the reliance on NBFCs and microfinance institutions for last mile credit. While praising it for aiding financial inclusion, the RBI deputy governor earlier this month also said that “the [microfinance] sector continues to suffer from [a] vicious cycle of over-indebtedness, high interest rates and harsh recovery practices”.

“Even lenders having access to low-cost funds have been found to be charging margins significantly higher than the rest of the industry and which in several instances appear to be excessive,” he lamented. These, by even NABARD’s own admission, are creating “pockets of indebtedness” in rural India. No caps on their rates and harassment by their recovery agents have forced some states like Tamil Nadu to frame special laws.

Also read: Our Rural Policies Deserve a Transformational Shift

Therefore, any meaningful stock-taking around financial inclusion must reverse the policies that attempted to replace brick and mortar branches in rural India with bank mitras. Let’s address the fact that India is still one of the largest under-banked countries. Let’s acknowledge the fact that our public sector banks are severely understaffed with an alarmingly skewed employee-customer ratio.

What we need is more public sector bank branches and more staff if we are to truly script a story of inclusion.

Sadly, instead of focussing on such essentials, the DFS has been busy micromanaging banks and swinging the sword of “efficiency”. Last year it demanded a periodical review of the performance of employees and officers by banks' management, and recommended the premature retirement of those who are found to be inefficient.

Instead of allowing for autonomy, the DFS is also trying to meddle into transfers with its one-size-fits-all rules, and is making a mockery of performance-linked incentives. The DFS secretary in fact made “surprise visits” to public sector banks to assess staff interaction with customers and gaps when compared to private sector banks. He reportedly found their attitude “unsatisfactory”.

What is carefully left unsaid in such sensationalism is the reality that public sector banks remain grossly understaffed and overburdened and any such comparison with their private peers is banal. The SBI, for instance, has 2,119 customers per employee, whereas the leader among private sector banks, HDFC Bank, has just 392 customers per employee.

And yet instead of recruiting more staff, we are relying on bank mitras.

What is carefully omitted is also the reality that the overwhelming majority of government schemes are serviced by public sector banks. From Jan Dhan to PM SVANidhi, it is the public sector banks that bear the weight.

Would these facts be on the table in the month-end deliberation?

Anirban Bhattacharya is a consultant with the Centre for Financial Accountability.

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