Kuldip Maity

Coins remain a big issue across the globe when it comes to depositing them in the bank. Here is an incident that I came across recently while surfing the net. Mr Grayson, a blogger, writes about his helplessness while trying to deposit his coins. Over a very long period of time he kept dropping coins into a really big bottle of wine (I leave that to the readers to work out the size of it). He saved a pretty sum. His challenge therefore was what to do with them. The logical option was to deposit them in his account. But he was flabbergasted when the teller told him that coins are not accepted as deposits.

That’s an experience from a first world citizen. And coins in the hands of citizens there are not so much a problem for the economy as it is in India. With a large informal sector driving the economy here where traders and micro business operators survive on small transactions, coins are an important medium of exchange. So much so that the tiny sector thrives on selling products against coins of various denominations going up to a denomination of Rs10. Banks in India however as in the first world are routinely refusing to accept them as deposits.

The main logic that the banks are taking shelter under is that a) it’s difficult to count large number of coins and unlike currency there is no automated mechanism to detect fake. Besides, storage is a big issue in far flung branches. The problem has really turned acute for the informal sector and the financial institutions like the MFIs dealing with them. According to the Coinage Act, one can deposit up to a lakh of rupees in coins in current account. But banks refuse to listen.

The problem is so acute that the Reserve Bank of India had to issue a press note for wide dissemination. The RBI in its 15 February, 2018 press note advised the banks not to refuse coins. The Bank even advised the banks to keep plastic sachets at the counters that could accommodate 100 coins per pack for distribution among depositors.

It said that coins may be remitted to the currency chest as per the existing procedure. The stocks thus built in the chest may be used for the purpose of recirculation. And then came the warning. “Any non-compliance in this regard shall be viewed as violation of instructions issued by the Reserve Bank of India and action, including penal measures as applicable from time to time, may be initiated.”

Despite the intervention, however, things haven’t changed on the ground. Persistent refusal to accept coin deposit by banks is acting as a major roadblock for trade and one hopes that a solution would be found soon.

The economic reality is cleary pointing toward the need for evolving a model based on individual lending alongside the accepted model based on joint liability. The reasons have been laid out in my last blog but for the sake of smooth flow of reading let me reiterate my position as it would be important for my argument in favour of the need to create specialised microfinance bank.

As I have been arguing and pointing out for some time, driven by the market reality there is a clear widening of spectrum of opportunities. When the microfinance movement started, the opportunities were limited and the enterprise windows were not as diverse as they are now. With limited diversity in opportunities for enterprise, the diversity of risk was also limited and understood by everybody. Therefore the group could be easily sold on a business proposal. But with the risk spectrup widening with the days in sync with opening up of new business opportunities, it is turning out to be difficult for an enterprising customer to convince a group on the bearability of the risk associated with his business poroposal. In short, it is the fear of unknown that acts as the strategic barrier to individual aspirations within the conventional joint liability group model. This reality obviously argues in favour of an individual based model, not so much as total replacement to joint liability but as a second model on offer.

But this is not all. Availability of finance needs to walk hand in hand with accumulation of savings. Within the existing microfinance model the industry is working more as an extension of banks rather than as an independent resource generator. Within the existing model, the microfinance industry is working as an extended JLG to the bank as it were. Banks are providing the funds to the industry. The industry is bearing the risk of micro lending.

Now if we just for a fleeting second remember that risk is priced as interest, the existing model tends to multiply risk with the resultant obvious impact on the cost of fund. On the other hand there is the issue of helping the customers save within an institutionalised structure. With the microfinance units not being banks, in order that they may help the customers access the financial market 360o , the units again act as agents of banks or other financial institutions.

The Grameen Bank experience and its success has a lesson for microfinance as a tool for poverty alleviation and development in a country like others. As a bank, the Grameen Bank in Bangladesh and then in the USA could fashion products in a manner that helped people within their locality to leverage local needs as business opportunities. Micro savings provided the funds that in turn got channelised into loan to help fund business plans. The concept helped cut out the intermediation model as it has evolved globally and in India. Grameen Bank was into intermediation but not as agents of other bigger financial institutions. It provided faster response to the local needs in an innovative way paving the way for more fluid development dynamics.

In India, the time has probably come for us to think along similar line and create microfinance banks for a faster traction than what is availble within the current model.