TNN | Dec 29, 2015, 04.56 AM IST
MUMBAI: A Reserve Bank of India panel has recommended that banks open a separate window offering interest-free deposits and advances to address financial exclusion based on faith. This has once again brought to the fore the concept of Islamic banking, which former RBI governor D Subbarao had said was not possible since the concept of interest payment was ingrained in present regulations.
The recommendation was one of the suggestions by the committee on 'Medium-term Path on Financial Inclusion', chaired by RBI executive director Deepak Mohanty. This is the first time that an RBI panel has gone way beyond the central bank's traditional domain. The RBI said that the panel was constituted taking inspiration from the remarks of Prime Minister Narendra Modi during RBI's 80th anniversary celebrations this year.
In recommending interest-free products, the committee has dipped into a 2008 report by present RBI governor Raghuram Rajan during his stint as chairman of the Financial Sector Reforms Committee. Rajan had then said that certain faiths prohibit the use of financial instruments that pay interest. "The non-availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region," the report said.
In interest-free banking, not only does the bank not pay interest it also does not engage in lending as a purely financial activity. The funding takes place on the basis of profit and loss sharing (PLS) by engaging in equity and trade financing. "An interest-free window is simply a window within a conventional bank through which customers can conduct business utilizing only Shariah-compatible instruments. At the inception of the window, the products typically offered are safekeeping deposits and the money so raised is deployed in trade-finance products for small and medium companies.
The panel has also suggested that the government launch 'Sukanya Shiksha', a special bank account for girls who enrol into middle school, and regularly credit funds into this account to curb dropouts. It has also called for doing away with subsidies on farm loans and use the money for a crop insurance scheme to prevent distress if there is a crop failure.
An earlier panel on financial inclusion constituted by Rajan and headed by banking veteran Nachiket Mor had suggested universal bank accounts by January 2016 and the creation of payment banks. With these two objectives almost achieved, RBI now aims to give inclusion a bigger push by using bank account infrastructure for social schemes and building last mile access to make these accounts more useful.
The Mohanty panel has reiterated the Mor committee's recommendation that a 'unique biometric identifier' such as Aadhaar be a prime driver for inclusion. Another radical suggestion is to allow cash withdrawal for those opening accounts with issuers of prepaid instruments. This recommendation will give a big boost for prepaid instrument companies like Oxigen, Citrus Pay, Itz Cash and others.
To improve availability of credit, the panel suggests that a transaction history of the account holders be used and Aadhaar-linked credit eligibility certificates be issued to the underprivileged such as landless farmers.
On credit to small businesses, the panel has expressed concerns over the viability of the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE), was which introduced in 2000, stating that the fund has become 'highly leveraged'. As against a corpus of Rs 5000 crore, the guaranteed loans stand at Rs 1 lakh crore. To reduce further pressure on the CGTMSE, the panel has suggested creation of multiple agencies to guarantee loans.
In its recommendation, the panel said that it is of the view that with the digitization of land records, which secures ownership, cooperative farming should be encouraged at the local level by panchayats. This would enhance the use of mechanization and reduce input costs and prices.
