Banks should extend rate cut benefits to students and SMEs

RBI has been at the center point, after it announced a surprised rate cut on 15th Jan, 2015. Finance Minister Arun Jaitely hailed RBI's decision to cut interest rates as an important turning point for the economy that should lift economic growth and investment.

Although, RBI in its last policy announcement on Feb 3, left rates unchanged, it did signal that a good budget may pave path for further rate cuts.

There has been a long pending demand by industry to lower interest rates, and the corporate sector in India and abroad is keenly observing unfolding of these events for further investments in the economy.

If interest rates will fall, industries can enjoy credit at an affordable rate which in turn can fuel India's economy at much higher speed. This speed of growth can be further accelerated if base of credit distribution can be enlarged.

However, banks should extend the rate cut benefits and focus to ease the loans for SMEs, students, rural areas etc.

Interest rate cut benefits needs to reach out to this section for a healthy economy.

Once financial institutions tap this opportunity, it will increase consumption power in economy and more consumption will once again help industries prosper as well as for the economy to grow steadily.

The Reserve Bank of India, in view of promoting SME lending, have issued a number of guidelines to banks, from time to time.

RBI has recently issued a master circular to enable banks to have the present instructions standardized, which includes the existing guidelines with regards to SME loans in India Through this, banks are advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises and a 10 per cent annual growth in the number of micro enterprise accounts.

The signal from RBI is clear to involve banking institutions in lending to SME sector. In real terms unlike corporate sector, SMEs do not have many ways to get loan. Due to small budget, they do not have financial consultants to advice on securing loans. Hence, RBI and Government have been propelling to make credit available for SME sector.

If SME sector can avail benefits of future rate cuts, it will lead to overall push for a steady economy. The loan availability to SME sector will lead to capital formation. This economic boom, will lead to more employment generation - both blue collar as well as white collar. In real terms, SME/small scale industries will drive 'Make in India' campaign.  

Another initiative for reaching the unbanked, 'Pradhanmantri Jan dhan Yojna' has been a huge success in number terms. Simply put, when 'non inclusive' are reached or involved in the banking system, it means more business. So the argument of 'risk' involvement with lending to bottom of pyramid looks weak in current scenario. This theory gets stronger by the example of mad rush for obtaining small bank license.

RBI has received as many as 72 applications for small finance banks. The small finance banks will undertake basic banking activities of accepting deposits and lending to the unbanked sections like micro business units, small and marginal farmers, micro and small industries and unorganised sector entities. At least 50% of its loan portfolio should constitute loans and advances of up to Rs 25 lakh.

Therefore, the signal is clear that corporate houses interested in opening small banks see good business opportunity in this segment. Reaching this segment, also suggests that small ticket loan plays a vital role in fueling the economy.

Generally top of the Pyramid comprising of corporate houses, Professionals and the likes, who can easily avail credits from banks. The problem remains with the bottom of pyramid; labourers/workers find it difficult to avail the same benefit from a financial institute. While the collapse in due to unavailable money in the bottom of the pyramid, results in the disturbance of the whole chain and an unstable pyramid base results in loss of consumption, which in turn signifies bad economic situation.

Therefore, for fueling the economy in real terms, this base has to be taken care into consideration. Keeping this base in mind, Government has now dedicatedly created a new ministry for skill development. Now it is the opportunity and responsibility of banking institutions to tap this bottom of the pyramid.

The further rate cut scenario has also raised expectation of education loan seekers. There is a good part of the population who is still unbanked and cannot avail education loan. Skill development and education loan are two sides of the same coin. We may call these credits by different names, but it has to be delivered simultaneously to complement each other.

The upcoming budget is expected to look into these peculiar problems with specific policy tools. There is a strong demand that government should create a credit guarantee fund similar to one created for MSME sector in India so that banks can finance education loans without any collateral from students.

Especially for rural students, banks should offer loans at concessional rate and with 100% guarantee from the trust. The same situation should also be handled by trust in case of default. Last government started a good initiative - Bhartiya Mahila Bank to reach out to women in a direct manner.

With more steps taken by Government for Women like 'Beti Bachao, Beti Padhao', it can use Bhartiya Mahila bank in an even more targeted manner. Govt may ask Mahila Bank to finance education loans of girls pursuing higher or vocation education, particularly in rural areas, as gender bias in the society keeps them out of education ambit due to unavailability of finance for education.

While everyone including RBI is keenly awaiting budget to get a clear picture for the next fiscal year, target consumers in the expected rate cut scenario should not be confused. Keeping bottom of the pyramid in priority, banks need to reach out to the population who really needs these services. We have the largest number of young population in the world.

This youth can be a big asset for the country, if fully deployed. Educational institutes are coming out with targeted courses for modern education required for skill development.

There are various institutes in this country who have launched innovative courses. However, lack of finance is a major obstacle in fully harnessing the potential of young population of the country. 

This obstacle needs to be tackled in totality by the Government and financial institutions. Youth in this country are full of ideas; they just need a financial backing to support their aspirations. Banks/Government needs to invest at the grassroots level, for a progressive and healthy economy.

(Ambarish Datta is the MD & CEO, BSE Institute)