Payments banks will need to build transactions-based models: Nachiket Mor
An RBI panel led by Mor has recommended a clutch of measures for financial inclusion in the country
Mor says the 2016 goal for universal electronic bank accounts is not based on business as usual and so it is not surprising that there has been debate on the timeline. Photo: SaiSen/Mint
Mumbai: A Reserve Bank of India (RBI) panel led by Nachiket Mor, who sits on the board of the central bank, has recommended a clutch of measures to make financial services accessible to the large number of unbanked people in the country. The suggestions, released by RBI on 7 January, include starting dedicated lenders for poor households and small businesses called payments banks, opening electronic bank accounts for everyone by January 2016 and increasing the mandatory lending by banks to economically weaker sections. Not surprisingly, some of the proposals have been questioned by commercial banks, which say these are neither practical nor sustainable. In an email interview, Mor justified the panel’s recommendations. Edited excerpts:
Banks feel that their priority sector lending (PSL) obligations will shoot up going by the model suggested by your panel.
The committee has not recommended an increase in the PSL target. It has recommended that PSL guidelines should enable more specialization vis-à-vis sectors and regions. A system of weightages has been proposed so that there is an added incentive to lend to certain sectors and regions. The adjusted PSL mechanism, by assigning relative weights, gives leeway to the bank to specialize, while at the same time making it more likely for credit to flow to those sectors and regions that have more pronounced shortfalls in supply of formal credit. Banks currently achieving their 40% PSL target would be in a good position to also meet the adjusted PSL target of 50%.
The panel has mooted a legally protected right to the customer to be offered only suitable financial services. How do banks assess the suitability aspect for every customer?
Banks are already assessing borrowers based on their internal processes for products such as home loans and credit cards. While for some segments of customers there is a lot of verifiable data that is available, for others, primary due diligence will have to be done by the bank. Our recommendation is that all RBI-regulated financial institutions follow a board-approved process in this regard, that will then need to be followed for every product that is offered by the bank. This will ensure that the provider fully understands the products that they are offering, and that it can demonstrate that it has followed the process which establishes suitability of sale.
Isn’t the 2016 target of bank accounts for all a little too ambitious?
The 2016 goal for the UEBA (universal electronic bank account) is not based on business as usual and so it is not surprising that there has been debate on the timeline. It assumes a significant acceleration of the pace of account opening, based on the Aadhaar issuance process, which in any case establishes the KYC (know your customer) details required for account opening. There are already 56 crore Aadhaar (identity) numbers issued. UIDAI (Unique Identification Authority of India) expects that enrolment of the entire eligible population will be completed by December 2015. Our recommendation is that the UEBA be opened automatically at the time of successful Aadhaar enrolment by the UIDAI for an enrolled individual desirous of obtaining a bank account.
Are payments banks a sustainable business model?
There are 26 licensed prepaid instrument providers today who have a viable business model based on leveraging existing distribution networks. So, there is no reason why a payments bank cannot be viable. Rather than rely on a traditional credit spread-based business model, payments banks will need to build transactions-based business models, something that mobile companies and retailers understand very well.