Should there be a “Right to Bank Account?”

Financial inclusion (FI) has become one of the top priorities of federal banks and governments across the globe. The issue demands an even greater importance here in India as the financial inclusion situation is grim. Despite being the Asia’s third largest economy, nearly 40% of the people don’t have a bank account. An RBI panel headed by Nachiket Mor, a member of the RBI’s central board, recently proposed a new class of banks, christened as “payment” banks, to be set up to enhance the coverage of financial services in India. This is a step in the right direction and this article argues as to why should the people demand for a “right to bank account”?

Financial inclusion, as defined by Zeti Akhtar Aziz, noted Malaysian economist, is “About providing an opportunity for the world’s 2.5 billion unbanked and financially underserved to participate in the formal financial system…” The global financial crisis of 2008 acted as an eye opener with regards to the importance of financial awareness.  Bringing the “financially untouched” population into the mainstream banking would not only improve their lives, but also bolster the economy.

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In the absence of financial inclusion, unregulated lending services sprout up. They usually ask for very high interest rates and repayment period is too short for any productive investment. They can get bullish in nature and leave customers to pay through the nose. Kate McKee, a behavioural economics expert, claims that a person caught in the claws of private moneylenders shows declining decision making and crisis management skills. This degrades performance in any profession.

Financial inclusion benefits the economy in multiple ways. It provides an easier way for the state to transfer benefits to people. It will eliminate leakages and curb corruption. Thus, the result would be a reduction in the government’s subsidy bill and putting the public money to more efficient use.

Another benefit is that having a bank account will encourage people to save money, and deposits could be used to extend capital to businesses. Growth in the formal banking sector is known to reduce reliance on “black” money for financing. Availability of affordable and adequate credit from the banking sector is known to boost the entrepreneurial spirits of people.

Achieving inclusion in the country of one billion seems a humongous task, and it indeed is, but as the old saying goes, “where there is a will, there is a way.” Several developing countries have taken innovative measure to address the issues, and the results are stellar. Kenya, for example, has leveraged the widespread presence of mobile phones to introduce a mobile-based financial services system called “M-PESA”. It is used by one-third of their population for cashless transfers, savings, financial transactions, etc. and could be replicated in India.

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M-PESA Model: How it works

Even private lenders can be made a part of the financial inclusion system under strict regulatory control. Brazil has in place a network of 95000 banking agents who have helped pull around 13 million people into mainstream banking. Bangladesh has adapted its regulatory framework to suit the growth of women-led micro financing institutions.

The biggest obstacle to relaxing the norms for banking growth is the fear of banking services being exploited for money laundering or even worse, funding terrorist activities. Financial Action Task Force, an intergovernmental body, was established in 1989 to counter these issues. Mexico has tried to address the issue by having “tiered” regulatory framework. Low-value accounts relax on the background checks but are subjected to more stringent transaction restrictions.

In 2008, more than 80 developing countries came together to form the “Alliance for financial inclusion,” an international knowledge sharing network to discuss and design policies on financial inclusion. Seeing the momentum in world economies towards financial inclusion, RBI acknowledged that it is the need of the hour. Based on the proposals of panels and think tanks, it has taken several steps for the expansion of financial institutions in rural India:

  • No frills accounts: These are the most basic accounts which offer only the basic services. These accounts have zero balance requirements and have helped attract more than 12 million Indians into formal banking.
  • Relaxation of Know Your Customer (KYC) requirements: No frill accounts can be opened up by showing up any one of a variety of photo IDs. For low-risk individuals, full KYC data updating exercise has to be carried out only after every ten years as compared to the norm of five years.
  • Banks at the doorstep: The introduction of information and communication technology, e-commerce, financial inclusion fund and online updates on markets, etc. have brought banks to the doorsteps.

The statistics presented below shows that these measures have achieved partial success in increasing the penetration of financial institutions in rural areas. “Crisil Inclusix Index” is used as a measure of FI. It collates three crucial parameters of bank penetration: branch penetration, deposit penetration and credit penetration. The Index has increased from 40 to 35 in the last five years, but it is mostly high for the states with high literacy. This implies that the poor, uneducated people who truly need an account are still excluded.

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 Under the recent proposal of RBI, existing banks are going to be allowed to open subsidiaries serving as payment banks. The Panel further proposes to have a universal electronic bank account (UEBA) for every person on the lines of the Unique Identification card scheme of central government.  Experts welcome the Mor’s proposals and believe that the concept of “payment banks” could prove to be a game changer. As Shinjini Kumar, head of banking at PWC India commented in financial express “I definitely think the proposed payment banks are better suited to achieve the objective of increasing penetration compared to the universal banks,”

Financial inclusion of the bottom half of the financial pyramid is an arduous, but crucial task that requires government will, support from leadership across political parties and careful policy crafting by RBI. We have this opportunity of leveraging the dormant potential of the financially secluded section of our economy. Who knows, it may herald a new era of growth and prosperity for all. So yes, it is time for government to give some serious thought to “Right to bank Account.”

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Vaibhav Kumar Singh is a PGP-2 student at IIM Ahmedabad and a member of Consult Club. He did his internship with The Boston Consulting Group. Prior to joining IIMA, he worked as a Software Development Engineer at Microsoft and as a research scholar at INRIA, France. He is a graduate in Computer Science & Engg. from IIT Jodhpur.

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Airline Debt Restructuring Plan

The Indian airlines industry exhibited explosive growth in the period from 2003 to 2007. Thousands of passengers started flying for the first time, drawn by new airlines offering bargain flights around the country. However, the industry was hard hit by the economic crisis in 2007-08. Passenger growth, which was touching 40% at the onset of 2007, went into reverse. Soaring fuel prices in 2008 pushed up ticket prices, which further reduced demand.

The three major players in the aviation sector in India – Jet Airways (India) Ltd, Kingfisher Airlines Ltd and National Aviation Co. of India Ltd (NACIL)—which collectively control 65% of domestic passenger traffic, were the worst affected. The three airlines currently have a combined debt of $13.5 billion (Rs63,315 crore). State-owned NACIL runs Air India. Other than the exogenous factors, poor managerial decisions including predatory pricing by the larger players and underutilization of capacity were prime contributors to the huge debt.

Factors Leading to the Debt

Kingfisher Airlines is labouring under a debt burden of Rs 7,413-crore (as on December 2009). Out of this, Rs 2,099 crore is short-term debt; the remaining amount being long-term debt. Subsequent to its launch in 2005, the first year and a half went quite smoothly for the airline. A lot of Jet passengers shifted allegiance and joined Kingfisher and the company registered rising profits. However, it spent money like water on onboard service and brand building; neglecting costs altogether. Things began to go downhill soon after the airlines a stake in Air Deccan in June, 2007. Not having a CEO further exacerbated the airline’s problems.

2008 proved to be the final straw in its operations, and as oil prices hit new highs, so did the merged entity’s problems. By end March 2009, the airline’s debts had touched over a billion dollars. Senior executives were also at loggerheads with oil companies, vendors and the Airports Authority of India.

Jet Airways is slightly better off than its rival. Although it has a debt of Rs. 14000 crore; short term debts constitute only a small portion of that amount. In 2009, Jet’s domestic revenues were 37% higher and profitability was superior to Kingfisher due to a higher share of full-service carrier operations, while the higher proportion of low-cost operations in Kingfisher’s operations dragged it down.

Furthermore, aircraft ownership is a key difference between the two airline companies. Jet owns 39 aircraft against 21 owned by Kingfisher Airlines. Difference in fleet ownership is reflected in Jet’s higher debt levels. As per Jet’s management, 85-90% of the debt is towards purchase of aircraft at long term interest rates of 5-7%.

In an effort to minimize losses, Jet entered into sale-and-lease-back of its aircraft, or the ability to sell off the aircraft it purchased and continued using them for a rental fee.

State-run Air India, which enjoyed a monopoly in the country till the deregulation of the aviation sector in 1991, is besieged by a debt of Rs. 40000 crore. One of the major factors for this colossal figure is over employment of labour. The airline has a workforce of 31,000; which translates into 230 employees per aircraft. According to international standards, the number should be 100-150 employees for every aircraft.

Another major reason for the spiralling debt are the massive aircraft orders placed by the beleaguered firm with aircraft makers — 68 with Boeing and 43 with Airbus. The orders were placed when the country was beginning to witness an aviation boom, but the figures were overestimated even according to the heydays. The orders cannot be cancelled now; since cancellation entails a hefty penalty, which the airline is ill situated to bear. Poor capacity utilization is another major issue for the national carrier, with over 40% of seats going unoccupied in 2009.

Braving the Storm

In June this year, SBI had approached RBI with a proposal to restructure more than Rs2000 crore of Kingfisher’s debt. RBI declined to clear that proposal as it was not comfortable with the idea of giving any special concessions to any particular aviation company. In an 18 June meeting with bank executives, the central bank noted it would be a moral hazard for RBI to give any regulatory forbearance for any specific company. It was made clear that any regulatory consideration of banks’ requests regarding restructuring guidelines could only be for the aviation sector—and not for any airlines in isolation—in view of the difficulties faced; and provided the banks came together in a consortium arrangement and took a long-term and holistic view on the restructuring.

This prompted the bank to put forward the case of the entire airline industry rather than that of a particular firm, which was approved by the RBI in September. The proposal asks for conversion of the short-term loans into long-term ones and then extending the repayment schedule to nine years, with a one to two-year moratorium. SBI’s investment banking arm, SBI Capital Markets Ltd (SBICaps) is working on the debt recast plan, leading a consortium of 13 banks.

The most significant beneficiary of the recast would be Kingfisher Airlines, and will get a much needed respite from the payment demands of various lenders including oil companies and airports. With the restructuring, more time would become available for repayment of loans and its operations would not be encumbered by the cash crunch. Other options like raising money overseas or diluting equity to raise cash could also be explored. In the fiscal ended March, the airline also reduced its losses to almost half of those posted in the previous fiscal. This improved performance was achieved through better seat occupancy and cost reductions.

While the airlines are talking about cost-cuts and route rationalizations to turn things around, Jet Airways posted a profit in the current fiscal year through a number of innovative strategies. These include improving aircraft utilization efficiency, increasing flights on existing and new routes without adding new aircraft, reducing the weight of flights to scale back fuel expenses, and launching a second low-cost carrier; by converting some of its full-scale flights into a no-frills all-economy service under the brand name of Jet Konnect. Jet Airways has also sought approval from the Foreign Investment Promotion Board (FIPB to raise $400 million via qualified institutional placement (QIP) to repay debt and augment capacity.

Air India’s debt of Rs. 40000 crore is a different story altogether. More than any proposed debt restructuring, measures taken by the government in terms of equity infusion and guaranteed loans would have a larger impact on the public sector carrier. However, the government has hinted that the airline should generate more funds through better passenger yields and cost-cutting, instead of expecting further bailouts.

Is the Restructuring Justified?

In the past, the government has extended support to crisis hit sectors such as real estate and steel on previous occasions, and there is no reason not to provide the same to the domestic airlines. However, the debt recast should come with certain riders. A major cause for the heavy losses was the overcapacity inducted by the airlines and the undercutting that followed.
They should commit to keeping costs under leash and run their operations with maximum efficiency. The debt restructuring also makes sense from the banks’ point of view. Big players like SBI have an exposure of over Rs. 3500 crore to the industry. RBI’s move would help provide relief to banks as they would not have to classify airline-sector loans as non-performing assets (NPAs), giving them an opportunity to contain the growth of NPAs, while airlines would get some breathing space to repay their loans and would not be compelled to raise costly debt to continue operations.