Sunday, January 31, 2016

The Reserve Bank of India (RBI) on 15 July 2015 constituted a committee to work out a five-year (medium-term) action plan for financial inclusion. The 14-member panel headed by RBI executive director Deepak Mohanty presented its report.

Panel recommends various aspects as follows :- 

  • Banks have to make special efforts to step up account opening for females, and the Government may consider a deposit scheme for the girl child – Sukanya Shiksha - as a welfare measure.
  • Given the predominance of individual account holdings (94 per cent of total credit accounts), a unique biometric identifier such as Aadhaar should be linked to each individual credit account and the information shared with credit information companies to enhance the stability of the credit system and improve access.
  • To improve ‘last mile’ service delivery and to translate financial access into enhanced convenience and usage, a low-cost solution should be developed by utilisation of the mobile banking facility for maximum possible G2P payments.
  • In order to increase formal credit supply to all agrarian segments, digitisation of land records is the way forward. This should be backed by an Aadhaar-linked mechanism for Credit Eligibility Certificates to facilitate credit flow to actual cultivators.
  • To phase out the agricultural interest subvention scheme which has distorted the agricultural credit system and ploughing the subsidy amount into an affordable technology aided universal crop insurance scheme for marginal and small farmers for all crops with a monetary ceiling of Rs.200,000 at a nominal premium to end agrarian distress.
  • A scheme of ‘Gold KCC’ (kisan credit card) with higher flexibility for borrowers with prompt repayment records, which could be dovetailed with a government-sponsored personal insurance, and digitisation of KCC to track expenditure pattern.
  • Encourage multiple guarantee agencies to provide credit guarantees in niche areas for micro and small enterprises (MSEs), and explore possibilities for counter guarantee and re-insurance.
  • Introduction of a system of unique identification for all MSME borrowers and sharing of such information with credit bureaus.
  • Establishing a system of professional credit intermediaries/advisors for MSMEs to help both the sector banks in credit assessment.
  • To further step up financing of the MSE Sector a framework for movable collateral registry may be introduced.
  • Commercial banks may be enabled to open specialised interest-free windows with simple products like demand deposits, agency and participation certificates on the liability side and cost-plus financing and deferred payment, deferred delivery contracts on the asset side.
  • An eco-system comprising multiple models should be encouraged with will foster partnerships amongst national full-service banks, regional banks of various types, NBFCs, semi-formal financial institutions, as well as the newly-licensed payments banks and small finance banks.
  • Banks’ business model to integrate Business Correspondents (BCs) with appropriate monitoring by designated link branches and greater mix of fixed location BC outlets to win the confidence of the common person.
  • Introduction of a system of online registration of BCs, their training and monitoring their activity including delinquency, and entrusting more complex financial products such as credit to trained BCs with good track record.
  • geographical information system (GIS) to map all banking access points.
  • To step up the self help group (SHG)-bank linkage programme (SBLP) initiated by NABARD with the help of concerned stakeholders including government agencies as a livelihood model.
  • Corporates should be encouraged to nurture SHGs as part of their Corporate Social Responsibility (CSR) initiatives.
  • Provision of credit history of all SHG members by linking with individual Aadhaar numbers to check over-indebtedness.
  • To restore tax-exempt status for securitisation vehicles for efficient risk transfer.
  • More ATMs in rural and semi-urban centres, interoperability of micro ATMs and use of application-based mobiles as point- of- sale (PoS) for creating more touch points for customers.
  • National Payments Corporation of India (NPCI) to develop a multi-lingual mobile application for customers who use non-smart phones, especially for users of national unified USSD platform (NUUP).
  • Permit a small-value cash-out with adequate KYC along for non-bank prepaid payment instruments (PPIs) to incentivise usage.
  • To allow PPI interoperability for non-banks.
  • Levying a surcharge on credit card transactions by merchant establishments should not be allowed.
  • Banks to complete the task of linking of deposit accounts with Aadhaar in a time bound manner so as to create the necessary eco-system for social cash transfer.
  • Financial Literacy Centre (FLC) network to be strengthened to deliver basic financial literacy at the ground level. Banks to identify lead literacy officers to be trained by the Reserve Bank in its College of Agricultural Banking (CAB) who in turn could train the people manning the FLCs.
  • The Reserve Bank to commission periodic dipstick surveys across states to ascertain the extent of financial literacy.
  • All regulated entities should be required to put in place a technology-based platform for SMS acknowledgement and disposal of customer complaints.
  • To strengthen the Information Monitoring System for District Consultative Committees (DCC) and State Level Bankers Committee (SLBC) deliberations.
  • The responsibility of the SLBC/lead bank scheme to be rotated among to instil a spirit of competition.
  • SLBCs to focus more on inter-institutional issues, livelihood models, social cash transfer, gender inclusion, Aadhaar seeding, universal account opening, and less on credit deposit ratio which is a by-product.
  • As a part of second generation reforms, the government can replace the current agricultural input subsidies on fertilisers, power and irrigation by a direct income transfer scheme.

Analysis ka part !

  • The panel has done well to take a systemic approach, instead of confining itself to banking channels. 
  • This, of course, runs the risk of converting the report into a broad narrative of needed reform across the real economy, and being added, with nods of weighty approval, to the shelf of expert reports that need to be acted on sometime this century. 
  • But it has the benefit of bringing out the interconnectedness of popular access to formal finance with institutions and practices relating to the real economy, whether land records and agricultural subsidy or the tax treatment of securitisation vehicles. 
  • The Supreme Court stands to gain much clarity on the utility of Aadhaar as it ponders the legitimacy of its use in assorted government schemes, if it were to glance through just the summary recommendations of the panel.

Need of the hour is !

  • While the report deserves broad endorsement, some specific recommendations stand out. 
  • The panel wants to remove the eight-percentage-point maximum mark-up on the interest rate charged to the end-borrower by financial intermediaries over their cost of borrowing from a bank. This would encourage inclusion of remote areas and communities. 
  • The recommendation to liberalise the norms for banking correspondents, while streamlining their regulation, and use mobile technology to cover the last mile, instead of asking banks to open yet more unviable rural branches, is hugely welcome. 
  • The focus should be on smartphones and their applications, as these will replace feature phones even in rural areas with remarkable speed not anticipated by the committee.

  • The committee does well to endorse direct cash transfers to administer subsidies. 
  • The use of Aadhaar to tag bank accounts of the beneficiaries will help reform the country’s subsidy administration and cut graft. 
  • The panel’s recommendation to link Aadhaar to each individual credit account and share the information with credit rating agencies makes sense. 
  • However, India must enact a robust privacy law to prevent any abuse of Aadhaar.

Moral of the Story !!

The committee sets a much wider vision of financial inclusion as ‘convenient‘ access to a set a basic formal financial products and services that should include savings, remittance, credit, government-supported insurance and pension products to small and marginal farmers and low-income households at reasonable cost with adequate protection progressively supplemented by social cash transfer besides increasing the access for micro and small enterprises to formal finance with greater reliance on technology to cut costs and improve service delivery, such that by 2021 over 90 per cent of the hitherto undeserved sections of society become active stakeholders in economic progress empowered by formal finance.

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