5683 - Five reasons why Modi govt’s grand plan to have 15 cr new bank accounts won’t work By Dinesh Unnikrishnan - FIRST BIZ

Five reasons why Modi govt’s grand plan to have 15 cr new bank accounts won’t work

By Dinesh Unnikrishnan 

The Modi-government has somewhat bought the idea of universal bank accounts, something first proposed by the Nachiket Mor panel in January, 2014. The plan will finally come up with a little bit of 'Modi'-fication. Instead of one full service bank account for every adult citizen by January 2016—the idea proposed by the Mor panel—the government plans to offer two bank account for every household within the next year.

This will probably be followed by a second phase, where the remaining citizens of the households will be covered over a period of next 2-3 years.The scheme will be announced on independence day as the flagship financial inclusion mission of the BJP government.

The government will execute the plan using the business correspondent (BC) network of state-run banks to reach out to the un-banked. According to a report in the Times of India, the Modi government plans to open 15 crore accounts with overdraft facility of Rs 5,000 in each account, which would mean that the state-run banks will end up issuing overdraft facility of around Rs 75,000 crore to fresh account holders with no credit history, apart from extending accident insurance of Rs1 lakh—a high risk to the banks.

There will be two key differences with the Aadhaar-linked universal bank account plan of Mor and the BJP-promoted financial inclusion plan. 

First, the latter will have more reliance on the data sourced from the National Population Register to fulfil KYC purposes, along with Aadhaar, instead of the Aadhaar-linked model proposed by Mor. 

Second, the burden of implementation will fully rest with public sector banks.

Why not Aadhaar? Beyond the obvious reluctance to embrace UPA’s flagship programme, there could be one other factor that concerns the BJP government—chances of illegal immigrants from Bangladesh getting the legal sanctity of a national registry by virtue of obtaining an Aadhaar number. Part of this exercise could be a possible examination of the information pool of those who have already enrolled under Aadhaar in certain geographies to see that the enrollment process is kosher.

Spreading financial inclusion—the process of spreading the banking services--in Asia’s third largest economy—is critically important to rescue the poor and economically weaker sections from the claws of informal financiers. There are no two ways about that.

Financial inclusion has progressed in a depressingly slow pace, despite 60-long years of independence, and several decades of existence of nationalised banks and progress of technology, especially mobile-based in the last decade.

This despite the RBI formally launching a three-year financial inclusion plan through state-run banks in 2010 and later following it up with another three year plan beginning 2013 through multiple channels such as BCs and issuance of no-frills or zero balance accounts.

Bank accounts are indeed the first step for someone in the hinterland to step into the world of formal finance. But merely pushing state-run banks to open banks accounts and extend overdraft to those who do not have a credit history could make financial inclusion a fear-generating word for executives at government-banks, and a form of obligation to appease bureaucrats and political bosses at the centre, regardless of whether the poor will actually end up using the account or not.

The approach adopted to achieve inclusion shouldn't be free distribution of bank accounts but a need-based one.

There are certain aspects that are relevant here:

First, just by opening free/ zero balance bank accounts, or no-frill accounts, no single citizen gets financially included in the system in its true sense. Often, such an exercise—imposing bank accounts to one with little money in hand no idea about what else could one do with a bank account—has backfired by leading to thousands of inoperative accounts. The reasons are obvious. Account holders didn’t have regular and assured income to put money in banks, nor did banks have the appetite to offer micro loans for these customers or accept tiny deposits.

As long as the poor remains poor and don't have savings, bank accounts opened for them as part of a financial inclusion programme will remain inoperative. It might be too early for them to embrace the world of commercial banking. The other way—wherein people with sufficient financial literacy and in need of a bank account to meet their savings and credit needs in line with their improving standard of life —would work better. Those bank accounts are unlikely to remain idle.

Second, absence of tailor-made financial products for the poor. There isn't an accurate estimate available for the actual size of informal finance market in India, but is at least Rs 30 trillion, as per some estimates. A majority of the poor and un-banked still resort to illegal chit funds and private money lenders to keep their hard earned money and avail of tiny loans, not necessarily because a nearest bank branch isn't available but because the bank often doesn't want to give him/her a Rs 5000 loan or accept a Rs 500 deposit.

Whether one has an account or not, a commercial bank typically doesn't do business with a customer unless they see a fairly large value transaction or a stream of potential cash flows.

Hence, a better proposition may be to increase awareness among the un-banked about the benefits of having a bank account, rather than forcing it on them merely for the sake of showcasing better numbers. This could be achieved using the expertise of financial intermediaries at the lower end of the pyramid--such as microlenders and self-help group/joint liability groups--who know much better than commercial banks about dealing with the poor.

Third, further relaxation of the KYC norms for small value accounts. The definition of small value accounts can be decided by the central bank. The RBI has already begun acting on this by making single address proof enough for opening bank accounts. There is scope to relax this further for small value accounts by letting them open a bank account based on their national identity number-Aadhaar or NPR.

This will encourage a lot more people not just to walk into a bank branch and open and account, but also to begin using the facility actively, thus serving its actual purpose.

Fourth, make maximum use of the microfinance companies to reach the poor and un-banked. The platform was set for this move when, in June, RBI allowed NBFCs to act as BCs. This has permitted even microlenders to do this job. NBFC-MFIs have years of experience in dealing with small value loans with rural customers. An arrangement can be designed where banks use such firms more effectively to reach out to the poor and offer financial services.

Fifth, there are no reasons why private and foreign banks are not asked to push financial inclusion in the same way as public sector banks do. Why it is always state-run banks that are used to bring about the greater cause of financial inclusion, something of national interest, and not the private sector banks? In the past three-four years, participation of private sector banks in lending to farmers and other economically weaker sections have lagged way behind state-run banks, despite private banks expanding presence in rural areas. This cannot be the case if inclusion needs to happen. Let's use our resources with prudence.

5584 - Local address proof no longer a hurdle for unbanked Indians - Live Mint

FIRST PUBLISHED: SUN, JUN 15 2014. 08 33 PM 

Local address proof no longer a hurdle for unbanked Indians 

This single requirement was potentially a barrier for millions of migrant workers Bindu Ananth 

RBI’s waiver has removed a big hurdle in the path to opening a bank account for a large section of population that can be characterized as carrying out “low value, low risk” transactions—a category of individuals who would previously have been excluded due to KYC or AML compliance requirements placed on banks. Photo: Pradeep Gaur/Mint 

Imagine you are a labourer in a village in Odisha and have painstakingly completed your Aadhaar formalities (for which you gave a proof of permanent address and your fingerprints). You moved to Chennai for some short-term opportunities on a construction site. While in Chennai, you are staying in a tenement with a few people from your village and want to open a bank account so that it’s easier to remit money to your family back in Odisha. You would realize that despite having an Aadhaar number, you need to have some proof of address in Chennai to be eligible for a bank account; a document extremely hard to produce for someone newly arrived in the city. This single requirement of a local address proof was potentially a barrier for millions of migrant workers (not just low-income) from accessing a bank account. The requirement for a proof of identity, along with a proof of permanent address and a proof of local address, although motivated by anti-money laundering (AML) and countering of financing of terrorism considerations, was unusual in its over-zealousness. US regulations (31 CFR 103.121), for example, do not require banks to verify current address and defines address broadly, even to include “a description of the customer’s physical location”. 

The Financial Action Task Force (FATF) guidance expresses a concern that controls that have been designed for standard risks and higher risks get applied to situations where the risks are lower, and therefore, this “over-compliance” approach by regulators and financial institutions could exacerbate financial exclusion risk, which, in turn, increases the overall money laundering/terrorism financing risk. 

In India, this rule had inadvertently kept large swathes of population out of the reach of basic banking services. Such population is typically migrant labourers and other workers who move to different locations for seasonal work as well as for permanent relocation, and women who move to new locations after marriage. 

On 9 June, the Reserve Bank of India (RBI) changed this by specifying that the new know-your-customer (KYC) rules no longer require an individual who wishes to open a bank account to furnish a valid proof of both permanent and local address along with a valid identity proof—proof of either the permanent or the local address would suffice. 

In instances where the customer is residing in an address that is different from the address furnished for account opening, the customer need only provide a declaration of the local address to which all correspondence is to be sent by the bank—no proof needs to be submitted for such an address and the bank may verify this address through “positive confirmation” such as by the acknowledgement of receipt of a letter, cheque books, or automated teller machine card, telephonic conversations or visits. 

This would come as a relief to potentially 60% of India’s population that do not have bank accounts and to 29% Indians who migrate to locations within India in search of gainful employment. The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households chaired by Nachiket Mor had in its report recommended waiving the requirement for documentary proof of the current address. 

The Committee had recommended that in addition to a strong proof of identity such as Aadhaar, banks be required to carry out careful tracking of usage and transaction patterns through a risk-based surveillance process developed internally by each bank. This would require strengthening of existing frameworks that banks use to look at bank account transactions. 

Transactions characterized by high volume or high value or a combination of both, or deposits or withdrawals associated with multiple accounts that are not commensurate with the characteristics of the account holders such as their backgrounds, income sources, nature of business, geographic location and such, can be identified and reported, as well as additional checks be built in for authorizing such transactions. 

RBI’s waiver has removed a big hurdle in the path to opening a bank account for a large section of population that can be characterized as carrying out “low value, low risk” transactions—a category of individuals who would previously have been excluded due to KYC or AML compliance requirements placed on banks. In conjunction with a national unique identity repository, it will become possible to authenticate transactions on a real-time basis, thereby obviating the need for knowing the current location of a customer. 

Some would argue that none of these restrictions applied to “small accounts”—accounts where transaction amounts are less than Rs.50,000. Despite neither proof of identity or address being required, banks have been reluctant to open these accounts. Clearly, therefore, implementation of these guidelines needs to be tracked carefully. Bindu Ananth is president, IFMR Trust.

Read more at: http://www.livemint.com/Money/H6YWNKTSDy3HHvsKNzeyrJ/Local-address-proof-no-longer-a-hurdle-for-unbanked-Indians.html?utm_source=copy

5454 - Keep Aadhaar above partisan politics; UID project holds out vast benefits - Economic Times

Keep Aadhaar above partisan politics; UID project holds out vast benefits

By ET Bureau | 10 Apr, 2014, 06.55AM IST

BJP's prime ministerial candidate Narendra Modi has dubbed the unique identity programme, Aadhaar, a political gimmick without vision. This is most unfortunate. The BJP's need to attack the unique identity project boss Nandan Nilekani, a Congress candidate in the ongoing elections from Bangalore, is understandable. But that does not mean that an eminently sensible project like Aadhaar should be sacrificed for a little partisan gain.

Aadhaar should be kept beyond partisan politicking, on par with rural electrificationBSE 0.52 %, the rural roads project and offering farmers minimum support prices for their crops. All of them benefit the people of the country and will raise the economy's productive potential. 

Aadhaar has given millions of India's ever-rising number of migrants a means of proving their identity. It has created a searchable database of non-duplicable identities defined by biometric characteristics. By linking this database with the National Payments Corporation of India's gateway, banks now have, for the first time, a nationwide infrastructure for electronic banking.

The government and the Reserve Bank of India (RBI) have worked together to make Aadhaar sufficient know-your-customer data for opening a bank account. The Nachiket Mor committee of the RBI has proposed leveraging all this, along with new banks and ubiquitous broadband, to usher in bank accounts for everyone in India. So, to debunk Aadhaar is to close the door on real financial inclusion.

When every beneficiary of any government scheme can be uniquely identified and has a bank account, it is possible to eliminate waste and leakage and create efficiency and savings.

The UPA government attempted this with its direct benefits transfer, but it was premature, given that most beneficiaries still do not have Aadhaar or Aadhaar-linked bank accounts. But this flaw in no way debunks the realisable potential to radically overhaul public finances. Narendra Modi should be the first to hail this potential, if he is sincere about his commitment to India's development.

5391 - ‘Aadhaar, telcos can be used to short-circuit FI process’ - Millenium Post

OPINION ‘Aadhaar, telcos can be used to short-circuit FI process’ 27 March 2014, New Delhi, Srishti Pandey Nachiket Mor, head of the committee on comprehensive financial services for small businesses and low income households (CCFS) which submitted its report in January this year, talks to Srishti Pandey on financial inclusion India is a poor country and will remain one for a long time, says Nachiket Mor, a member of the RBI’s central board of directors and head of the committee on comprehensive financial services for small businesses and low income households (CCFS) which submitted its report in January this year. In a candid interview, Mor argues why it is important for banks to work around different economic considerations, how Aadhaar and telcos can be used to clear the logjam between banks and customers, and why one good idea is just not enough to satiate the needs of the vast Indian market.  Edited excerpts: RBI deputy governor K C Chakrabarty aims to provide bank access to every household by 2016, while you say that every adult individual should have a bank account. Is he being overly conservative or are you being too ambitious? I think what we both say makes a lot of sense. Clearly, the unit of interaction is the household. The presumption is that the head of the household will be the person who will borrow money, and do other banking activities. The opportunity that we have today from which we can benefit is that there are almost a billion mobile phone connections in the country. All the telcos have fulfilled the know-your-customer (KYC) requirements in some form or the other. In fact, RBI itself requires no KYC for accounts below Rs 50,000. Also, Aadhaar is doing a lot of work in terms of collection of data. So we suggested that this data can be used to create an account in the cloud right away by partnering with the UIDAI. And if Aadhaar is not working then we can look at mobile portals because these mobile phone companies have already got 700-800 million customers and so one can even argue that if we go in that direction, 2016 is too long. If on the other hand banks continue to say that they want a formal structure for reaching out to the unbanked areas then that could even take another 30 years. What Chakrabarty has in mind is comprehensive inclusion and that even we agree will take longer because it is not clear that everyone wants credit and so banks will have to go the old way to give credit. Our targets are more around opening accounts and payments which can move quickly. You have based your 2016 target on the success of Aadhaar but the UID initiative is facing multiple challenges. The UIDAI are at a run-rate of about 10 lakh customers per day and by May they are likely to complete 70 crore. So if they are generating a million numbers a day then by 300 days they should get done. But generating the Aadhaar number is not enough. A customer will still have to go to a bank to activate an account. What we are trying to do through this mechanism is to break the logjam of who goes to whom first – whether it is the customer going to the bank or vice versa. It is about short-circuiting the process. Leveraging Aadhaar or telcos is an easy and low-cost pathway.     Your panel is strongly in favour of leveraging mobile technology but what about this turf war between telcos and banks in terms of sharing customers, revenue model, etc? In one of the recommendations we argue that the current strategy which we follow is perhaps the riskiest. We have created Airtel Money as a PPI [prepaid payment issuers] where we have told them that they cannot get a cash-out. Whatever money they collect has to be put into an escrow account. We argue that for a customer it creates risk because once I open an account with Airtel Money and later decide to close it, I will not be able to take the money out. I’ll have to spend it somewhere. The second point is that, for example, Airtel Money opens accounts for all of its 200 million customers; then in its current structure it becomes 20 times bigger in terms of the number of customers than its host bank. Now, if Airtel Money fails for some reason, even the host bank will fail and vice versa. We thus argue that it is safer to snap that relationship (and interdependence) between banks and telcos. If a bank wants to create a payments company it should be allowed to create a subsidiary of its own and operate with it. Airtel Money, we feel, should be allowed to become Airtel Money Bank so therefore there is no link with any bank and instead of putting money in an escrow, they put money in government securities and are regulated like any other bank. But are there many takers for this model? Our sense is that this is the way forward for them to grow. It is because even after five years of operations, Airtel Money only has 40,000 cash-out bank accounts out of 200 million Airtel customers, and this is ridiculous. In other countries the same players have gone ahead and become huge players – in not just four countries but in Europe also there is a movement towards non-bank companies. So if you take two potential competitors and ask them to collaborate, then the business doesn’t grow. Each must be left to do their own things and while there will be some competition for margins, this is more of an additionality.     If banks claim that they have realised the business opportunity of FI and are looking at it with seriousness, why do we need other institutions? The thrust of our report is that there is no one good idea. So it depends a lot on the banks and dynamics of an area. Different entities do well in different areas and it is about adopting the right model for the right place. For example, in Punjab, where banks were always doing a lot of lending, they would be more than happy to do FI there. You call the payments banks a safe option. Some bankers think it is a risky model and the product of our impatience for results which could be destructive for the entire ecosystem. Your views? Clearly, we take the same view of the PPIs that are there today. So, maybe, what some of these bankers are saying is that shut down Airtel Money, Vodafone M-Paisa and the others. But what we are arguing is similar to them, that it is better to make them a bank. A payments bank effectively is like any other bank but which says that it will not lend money and instead buy government securities from whatever deposits it gets. There is some talk of expanding white-label ATMs to tier-3 and -4 areas despite their slow roll-out in tier-1 and -2 areas. What is the logic? We are not talking about white-label ATMs and are instead talking about white-label BCs. BCs already exist on the ground and when we spoke to them during the drafting of the report the common complaint was the viability aspect. As a BC of a bank for instance, he/she can only serve say 20 per cent of the villagers who are customers of that particular bank. So in order to bring about viability, it would make sense to make these BCs white-label BCs who could service all the banks and thus cater to 100 per cent of the villagers no matter which bank’s customers they are. For viability and better retention of BCs, shouldn’t banks instead explore the option of giving these BCs permanent employment? The panel certainly believes in the notion of a bank in a bank. So instead of BCs becoming an employee of a bank it makes a lot of sense for banks to create specialised units inside the bank that have a different focus, pay structure and the BCs are a part of this group. The challenge that banks have found is that while initially you may start like that you end up facing the old troubles where there are unions, strikes, etc., and the pay scales become the same. And that is why people have liked the notion of an agent who is not on your rolls. So one way to solve the viability and retention issue is to make the BCs your employee but effectively you are also raising your cost structure. Instead, it is better to look at adjacencies. Today, banks are in talks with CSCs, mobile recharge outlets, etc and that is because these entities have adjacencies and multiple sources of revenues. This is a more promising mode. It is important to bear in mind that one challenge of India will remain, we are a poor country and will remain a poor country, at least on the per capita basis, for a very long time. It is thus unrealistic to expect that we will have a lot of customers who will keep huge sums as balance in their accounts and so we will have to find low-cost methods to reach out to these customers. And this is why the payments banks look attractive. MFIs have existed for long and have done well. But do you think with greater banking penetration a few years later, MFIs should rethink their business model and consider becoming BCs or banks? What we recommend is that just like we are talking about PPIs becoming payments banks, we recommend that MFIs should become wholesale banks so that they become a part of the banking system, can continue with their business model of wholesale borrowing and lending and maybe in four-five years if they can demonstrate that they can run this business successfully, they can apply to become a full-service bank.      Your report also argues that the regulator should be a referee and not a captain always directing banks. By that logic, we should also do away with this norm for 25 percent branches in rural areas. We did spend a lot of time debating this question during the committee meetings. Most bankers felt that this norm has been fruitful because otherwise there is so much opportunity everywhere that banks may not need to go beyond urban centres. What we put down, therefore, is that branches need to be defined more flexibly. So the RBI should continuously evaluate if the norm is necessary as more and more players enter the sector and a lot of inclusion activity has happened. What about this perception that private players are not doing enough and still treat it as CSR? When there were only small private banks, one could take that view. But a large private bank with a Rs 5,00,000 crore balance sheet out of which 40 per cent is coming from rural areas will have to do financial inclusion as a serious business; if not there will be defaults and they will have to shut down the bank. So I think everybody is trying their best to do this business as well as they can. We have spoken about the supply-side of banking services but what about the demand-side? The panel believes that there is a lot of latent demand. We don’t find a shortage of demand for savings, payments or even credit for that matter. The challenge has been our ability to ensure good supply because we make access so hard that the moneylenders and adtiyas (conduits) continue to flourish. Banks may feel that Rs 1,500 is too small an amount but it is important to remember that everybody’s economic circumstances are different. By arrangement with Governance Now

5364 - Ministry’s scepticism, Aadhaar issues hang over Nachiket Mor panel report -Live Mint

Ministry’s scepticism, Aadhaar issues hang over Nachiket Mor panel report

The report is a key element of Raghuram Rajan’s effort to build a framework to promote financial inclusion

Dinesh Unnikrishnan 

Nachiket Mor says he isn’t aware of any finance ministry reservations on the report of his panel and hadn’t interacted with the ministry on it. Photo: SaiSen/Mint

Mumbai: The finance ministry has questioned the practicality of some recommendations made by a panel formed by the Reserve Bank of India (RBI) to promote financial inclusion, including a 1 January 2016 deadline it has set for making an Aadhaar-linked bank account available to every adult Indian.

The panel headed by Nachiket Mor, a member of RBI’s central board, released the report on 7 January and the central bank sought public feedback on it until 24 January. Three months on, the central bank hasn’t followed up on any of its proposals.

“(There are) many loose ends that need tying up. Problem (is) compounded by some simplistic assumptions too,” financial services secretary Rajiv Takru said about the Mor panel’s report, when asked if its recommendations were workable.

Takru, who takes over as revenue secretary from Sumit Bose after the latter retires at the end of the month, didn’t elaborate beyond saying the report was otherwise a “good effort”.

Mor, a former deputy managing director of ICICI Bank Ltd, said he wasn’t aware of any finance ministry reservations on the report of his panel and hadn’t interacted with the ministry on it.

The ministry’s stance on the committee’s recommendations assumes significance in the backdrop of the fact that the report is a key element of RBI governor Raghuram Rajan’s effort to build a framework to promote financial inclusion in a country where 60% of the population does not have a bank account.

A key assumption made by the panel is that the Unique Identification Authority of India (UIDAI) would complete enrolment by December 2015 under the Aadhaar project, which is aimed at providing every resident in India with a unique 12-digit identity number. Based on that assumption, the panel set the 1 January 2016 deadline for full financial inclusion.

Shikha Sharma, managing director and CEO of Axis Bank Ltd and S.S. Mundra, chairman and managing director of Bank of Baroda—both members of the panel—had in a note to Mor said that January 2016 can be “an aspirational goal” for nationwide spread of banking services but given the “scale of the task”, January 2018 was a more realistic deadline.

Last month, at a meeting of RBI’s financial inclusion advisory committee, some departments of RBI too had flagged concerns on the implementation of the Mor panel’s report, according to a person who has seen the minutes of the meeting. The person didn’t want to be named.

The panel recommended that every Indian resident be issued a Universal Electronic Bank Account (UEBA) by national banks automatically at the time they receive their Aadhaar numbers.

Other suggestions included the creation of dedicated banks for promoting financial inclusion called payments banks, and refined targets for banks to lend to weaker sections, among others.

In an interview to Mint on 21 February, Mor had defended the panel’s proposals, arguing that the January 2016 deadline for UEBA was not based on “business as usual” and so it was not surprising that there has been debate on the timeline.

“There are already 56 crore Aadhaar (identity) numbers issued. UIDAI 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,” Mor said.

Implementation hurdles

But with Nandan Nilekani resigning as the chief of UIDAI to contest election from Bangalore South Lok Sabha constituency and the Congress party-led United Progressive Alliance government’s term coming to an end soon, the implementation of the Aadhaar project has plunged into uncertainty.

UIDAI, which came into existence on 28 January 2009, has so far covered only about half of India’s population.

“There are significant implementation bottlenecks for this (Mor panel report). There are possibilities that the new government will significantly modify the whole Aadhaar project. At this time, there is an uncertainty,” said Vijay Mahajan, chairman of India’s oldest microlender Basix, and an expert on financial inclusion.

Also, the Supreme Court’s direction to the centre on Monday to immediately withdraw any instruction issued by it for making possession of the unique identity number mandatory for citizens to avail of government services is a setback to the Aaadhar-linked financial inclusion plan, Mahajan said.

“The direction of the recommendation is good but the roadmap for implementation is unclear. In the absence of an adequate implementation framework, the report will become only a statement of good intent and there is no hope for at least next six months of any progress,” Mahajan said.

The Indian Banks’ Association, the lobby group of lenders, too had questioned the Mor report in January, arguing that some of its key proposals were impractical.

IBA, which has communicated the lenders’ feedback to RBI, said the 1 January 2016 deadline to ensure a bank account for all adult citizens wasn’t feasible and it would require at least until 2018 to achieve the goal.

It also objected to the panel’s proposals to implement a 50% adjusted target for so-called priority sector lending, as against the current 40% fixed target, and hold banks legally responsible if they did not offer suitable financial services to low-income households and small businesses.

The panel proposed to make it mandatory for banks to disclose their concentration levels to each segment in their financial statements, in an attempt to encourage banks to actively manage their exposure to various sectors, including the priority sector that includes agriculture and economically weak sections. Banks are required to channel 40% of their loans to the priority sector.

5219 - Payments banks will need to build transactions-based models: Nachiket Mor

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

Dinesh Unnikrishnan 

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.

5179 - Jamal Mecklai: Paradigms shifting - Business Standard

Jamal Mecklai: Paradigms shifting

Jamal Mecklai  February 6, 2014 Last Updated at 21:44 IST

Does anybody remember what it was like before mobile phones? There were millions of harrowing stories - I can recall a few myself - but the remarkable thing is they all seem like stories, not reality. This complete transformation of a set of experiences by technology (or some other proverbial irresistible force) is called a paradigm shift, which usually delivers immeasurable economic benefit and from which there is no looking back.

The good news is that there are several paradigm shifts brewing. The first, of course, is Aadhaar, which has already enrolled more than 500 million people; I believe at its current rate, more than half of all Indians will have an Aadhaar number in a month or two. Granted that it is currently going through a sudden low pressure, but this hiccup is patently political and certain to be short-lived.

In terms of impact, Aadhaar, in the words of John Paul Jones, hasn't even begun to fight. In the six months since it was launched in June 2013, there have been a mere 40 million transfers under the direct benefit transfer for LPG, totalling about Rs 2,000 crore. Given that India's subsidy payments are well over Rs 2 lakh crore, and that, conservatively speaking, a direct benefit scheme in full flow should save around 50 per cent of this, we have, as I said before, not even really started.

It will doubtless take another four or five years before the Aadhaar system becomes as much a fact of life as mobile telephony is today. The direct macro benefit will be a sustained reduction of the budget deficit by well over one per cent of gross domestic product (GDP); this means inflation will be more readily controlled and interest rates can be lower. Not only will this have a sustained knock-on effect on growth, but, like mobile phones, will have an immeasurable impact on individual lives and the economy at large.

The next paradigm shift is barely in the economy at this point. It stems from the frighteningly detailed report of the Nachiket Mor committee on financial inclusion. Like most things Mr Mor does, the analysis is extremely thorough and, starting from first principles, comes to some startlingly obvious conclusions. For example, after decades of failed efforts to improve financial inclusion using the existing banking framework, it hardly makes sense to simply increase the number of banks; rather, we need to license different types of banks, where the arithmetic of profitability would drive inclusion. He has laid out an extremely tall order, and there are many who have argued against it merely on this count. But faint heart never won fair lady (or gentleman), and the irrefutable logic of the plan(s), coupled with a governor who is both market-leaning and market-aware, suggests that we will see much of the committee's report taking shape.

Note again that it will be several years - five to ten - before we begin to accept these new structures. But when it does happen, look out! Not only will individual lives be hugely improved, but, on a macro level, getting the hundreds of millions of unbanked Indians into the financial system will boost the savings rate substantially, reducing the need for foreign savings to support our investment needs. This will structurally improve our current account deficit, and, with that, provide some real support to the dear old rupee.

On that subject, the Reserve Bank of India and the government need to recognise that India is both the largest buyer and largest holder (potential seller) of gold, and, as such, should be a price maker rather than a price taker in the gold market. A genuine, logical effort to create a domestic gold market (rather than letting it be wagged by the London Bullion Market Association, or LBMA) could yield yet another paradigm shift, adding another layer of structural support to both the current account deficit and the rupee.

The final visible paradigm shift is, of course, the Aam Aadmi Party (AAP). Like Aadhaar, it is currently suffering some public relations trauma, but in the battlefield of politics, this is par for the course. The good news is that the AAP is already delivering value in terms of changing the rules of the political game - the Bharatiya Janata Party in Rajasthan has started mimicking the AAP in some ways, and, as we go forward, all parties will be compelled to field candidates of both integrity and ability. Of course, politics is far murkier battleground than even global financial markets, so it will likely take much longer - 15 to 20 years - for corruption to go the way of landline telephones.

And as all this comes together, I will make my favourite forecast for the rupee, with a multiple choice to all of you: 38 to the dollar in less than five years/less than 10 years/less than 15 years/less than 20 years.

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