January 2019
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Banking Renaissance: Inclusion, Innovation & Implementation

By S. S. Mundra, Deputy Governor, Reserve Bank of India

As you might know, the word ‘Renaissance’ has a French origin meaning re- ‘back, again’ + naissance ‘birth’ (from Latin nascentia, from nasci ‘be born’). Renaissance refers to a period which witnessed a revival of European art and literature under the influence of classical models in the 14th–16th centuries. Another dictionary meaning of renaissance is ‘a revival of or renewed interest in something’.

I am not too sure in what context has the word ‘Renaissance’ been referred to in the theme of this Conference. Obviously, you could not be talking of revival of interest in classical mould of banking and about innovation in the same breath. Likewise, I am not too sure whether it has something to do with a revival of or a renewed interest in banking, as I don’t think the interest of the society in banking, more so, in a developing economy like ours, has ever waned. My understanding of the theme for the Conference is that we probably need to deliberate about the innovative measures needed in our banking sector which would render it more inclusive, vibrant, productive, efficient and above all, customer-centric. Therefore, in my address today, I would speak with this basic presumption and I do hope that I am not veering away from the theme.

Evolution of banking

But before I get into the subject proper, just to set the context, I would like to briefly highlight how the modern day banking has evolved. Banking, in the form that we know today, might have evolved during the 17th century. However, even in ancient Mesopotamia, all the modern banking practices such as deposits, interest, loans and letters of credit seem to have existed. The practice of safe-keeping and savings also seem to have been in existence in the temple of Babylon as early as 2000 B.C. Closer home, Kautilya, in his Arthashastra written in about 300 B.C., has also mentioned about the existence of powerful guilds of merchant bankers who received deposits, and advanced loans and issued hundis (letters of transfer). In the modern times, an experienced Scottish goldsmith, William Paterson, is credited with the idea of setting up a national bank in Britain in 1688, which gave birth to the Bank of England. The modern day banking, in its simplest form, is meant to facilitate financial intermediation between the savers and the borrowers. It also seeks to act as a safe place to store money and earn some return in the process, as also a place to seek simple financial solutions to individual problems. The advent of technology in modern times has heralded three distinct phases in banking: a) Computerization of back office processes during the 1980s, b) Facilitating higher customer convenience during the 1990s and c) Enabling lifestyle/life stage banking during the 2000s. Thus, over time, the banks have witnessed significant changes in their outlook and have emerged as financial supermarkets offering a range of complex financial products and services on a round the clock basis, duly customized to the needs of their customers through multiple delivery channels.

RBI, as the regulator of banks in India, has increasingly deregulated the sector and has allowed the market players to develop products and services best suited to their customers. As a result, both in terms of products & services and delivery channels, there has not been any dearth of innovations. On the product front, the innovations have led to emergence of complex offerings like swaps, derivatives and securitization, while on the other hand, the delivery channel is no more limited to brick and mortar branches, but has spread to modern, technology-driven channels like ATMs, mobile, internet and the social media, besides the Business Correspondent model. Thus, over the years, there has been tremendous amount of progress and innovations in the sector. However, these developments have, simultaneously, raised certain pertinent questions:

Whom have these innovations benefited?

Are these product offerings demand driven?

Have the banks addressed the ‘suitability and appropriateness’ question?

Have the charges for various services been made transparent and non-discriminatory? Why banks are still a place where ordinary mortals fear to tread?

Why has a large section of the society remained financially excluded despite sincere efforts of the regulator as well as the policy makers?

Having an insider’s view of India’s financial system, first as a commercial banker and now as a central banker, I intend to use this opportunity today to share my perspectives on the approach adopted by RBI as the regulator of Indian banks for making the Indian banking sector more inclusive and relevant to a large cross-section of the Indian economy and society. I shall also delve on the challenges which the banking system is encountering in realizing the goal of universal financial inclusion and the innovation and reforms that may be necessary to overcome some of these challenges. I also wish to emphasize that having bright and innovative ideas do not have any meaning until and unless they are acted upon. I, therefore, compliment the organizers for including ‘implementation’ as an element of the theme for the conference, as I believe that rigor in implementation is extremely important for realization of the dream of universal access to financial services and products.

Why is Financial Inclusion necessary?

The ILO Declaration of Philadelphia in 1944 proclaimed that “Poverty anywhere is a threat to prosperity everywhere.” It is universally agreed now that Financial Inclusion helps build domestic savings, bolster household, domestic and financial sector resilience and stimulate business and entrepreneurial activity, while exclusion leads to increasing inequality, impediments to growth and development. Thus, financial inclusion is an important tool for poverty alleviation as it not only connects individuals to the formal financial system, but also inculcates savings habit among them. Hence, Financial Inclusion or inclusive banking is a precursor for inclusive and sustainable economic growth.