By Dr Srinivasan Santhanam
Mor Committee on Comprehensive Financial Services for Small Businesses and Low Income Households- Major Recommendations and Comments
Premise / Current status as presented in the report
Close to 90% of small businesses have no links with formal financial institutions and 60% of the rural and urban population do not even have a functional bank account. And, while the bank credit to GDP ratio in the country as a whole is a modest 70%, in a large state such as Bihar, it is even lower at a mere 16%.
On the savings front, difficulties of access combined with an absence of a positive real return on financial savings, has accelerated the move away from financial assets to physical assets and unregulated providers. RBI‘s June 2013 Financial Stability Report notes that savings as a proportion to GDP has fallen from 36.8 per cent in 2007-08 to 30.8 per cent in 2011-12 and the financial savings of households have declined from 11.6 per cent of GDP to 8 per cent during the same period.
Terms Of Reference
1. To frame a clear and detailed vision for financial inclusion and financial deepening in India.
2. To lay down a set of design principles that will guide the development of institutional frameworks and regulation for achieving financial inclusion and financial deepening.
3. To review existing strategies and develop new ones that address specific barriers to progress and that encourage participants to work swiftly towards achieving full inclusion and financial deepening, consistent with the design principles.
4. To develop a comprehensive monitoring framework to track the progress of the financial inclusion and deepening efforts on a nationwide basis.
5. Any other related issue/s the Committee may want to opine on.
The Committee report has outlined six vision statements for full financial inclusion and financial deepening in India: Recommendations have been made to bring these six statements to fruitition with a dead line (or shall I call it live line) of 01 Jan 2016
- Universal Electronic Bank Account (UEBA): Each Indian resident, above the age of eighteen years, would have an individual, full-service, safe, and secure electronic bank account.
- Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges: The Committee envisions that every resident in India would be within a fifteen minute walking distance of a payment access point.
- Sufficient Access to Affordable Formal Credit: Each low-income household and small-business would have access to a formally regulated lender that is capable of assessing and meeting their credit needs. Such a lender must also be able to offer them a full-range of suitable credit products at an affordable price.
- Universal Access to a Range of Deposit and Investment Products at Reasonable Charges: Each low-income household and small-business would have access to providers that can offer them suitable investment and deposit products. Such services must be available to them at reasonable charges.
- Universal Access to a Range of Insurance and Risk Management Products at Reasonable Charges: Each low-income household and small business would have access to providers that have the ability to offer them suitable insurance and risk management products. These products must at minimum allow them to manage risks related to: (a) commodity price movements; (b) longevity, disability, and death of human beings; (c) death of livestock; (d) rainfall; and (e) damage to property.
- Right to Suitability: Each low-income household and small-business would have a legally protected right to be offered only suitable financial services. She will have the right to seek legal redress if she feels that due process to establish Suitability was not followed or that there was gross negligence.
Comments- in general:
The title of the committee covers two set of potential banking clients viz., ‘Low income households and small businesses. So, the committee has, by and large, gone with the analysis of those two categories and leaving the bottom of the pyramid households viz., the poor and the poorest.
The Committee has attempted to chew more than what it can bite. A host of recommendations- such as repositioning institutions like NABARD, modifying Priority Sector Lending norms, modifying the CD Ratio and linking to GDP, establishment of whole sale investment banks, whole sale consumer banks, reducing the number of NBFCs to two categories, having a single regulator etc., have been made. Some of them would require in depth research and analysis by independent expert committees. But, the committee has gone ahead with such recommendations without much rationale or analyzing ‘WHY’ aspect on each of them before making such recommendations.
Most of the literature review heavily depends on international experience which are not directly relevant to Indian context. Ex: Kenya . It is a country with very weak banking system but electronically connected to payment system ‘m-pesa’. This satisfies only one part of financial inclusion viz., remittance services.
Huge work has been done by various committees before. Some of them are,
1) Gadgil Study group of National credit council for organizational framework for the implementation of social objectives.( 1969)
2) F.K.F Nariman committee of bankers for the preparation of coordinated programme for providing adequate bank facilities in the unbanked district.(1969)
3) M.Narasimhan committee to review the flow of credit especially to the weaker section of the rural communities(1975)
4) B.Sivaraman Committee to review Arrangement for Institutional Credit for Agricultural and Rural Development (CRAFICARD 1981)
5) A.M.Kuusro Agricultural Credit Review Committee(ACRC1989)
6) Thorat committee on CD Ratio (2004)
7) Smt Usah Thorat A High Level Committee was constituted to review the Lead Bank Scheme and improve its effectiveness, with a focus on financial inclusion and recent developments in the banking sector ( 2007-08)
8) Dr.C.Rangarajan Committee on financial inclusion (2008)
None of the recommendations of these earlier committees were found to be useful to the Mor Committee. But, it has found a lot of comfort in international experience, Aadhaar etc.
A number of recommendations were identical and repeated under various sub-headings. ( a minor observation only).
Customer education thro financial literacy programmes, capacity building measures for banks and others that are needed to take up new roles have not been given much importance.
Except in the case of opening UEBAs, recommendations only mention providing access and ensuring providing services to the unbanked. One is providing access (it is already there in a number of forms). The challenge is ensuring the unbanked to get /use these services at an affordable cost to him/her.
Comments on major recommendations:
i.CCFS Recomm: Universal electronic bank account (UEBA)
Every resident should be issued a Universal Electronic Bank Account (UEBA) automatically at the time of receiving their Aadhaar number by a high quality, national, full-service bank. An instruction to open the bank account should be initiated by UIDAI upon the issuance of an Aadhaar number to an individual over the age of 18. The bank would need to be designated by the customer from amongst the list of banks that have indicated to UIDAI that they would be willing to open such an account with the understanding that it would attract no account opening fee but that the bank would be free to charge for all transactions, including balance enquiry with the understanding that such transactions‘ charges would provide the host banks with adequate compensation. The Bank would be required to send the customer a letter communicating details of the account thus opened. The Committee recommends that the RBI issue a circular indicating that no bank can refuse to open an account for a customer who has adequate KYC which specifically includes Aadhaar. [Identical to Recommendation 5.1]
One is ensuring a bank account for all those above 18 yrs by 1 Jan, 2016. It is altogether another matter as to how will banks/financial institutions ensure their continuity as live accounts. Sometime in January 2014 (13th) an ad in national dailies brought out by the SBI directed that if any account with a balance of less than Rs.500 is not operated for 2 years, then fresh KYC compliance is mandatory. Otherwise, the bank will charge a nominal fee of Rs.112/- as charges for maintaining such accounts. How will members of lower income households who have opened such small deposit accounts with banks would pay such huge charges just because they have not operated their bank accounts for that period. Recent discussions and proposal of IBA on charging of customers on use of ATMs is also an issue. If electronic payment system is to be provided, then charging poor rural and poor urban customers having bank accounts will be an issue that needs to be addressed.
The recent announcement of the RBI Governor on the banks charging various service charges including use of ATMs of other banks by customers etc., have proved to be retrograde as allowing use of other bank ATMs was earlier considered as it would help in optimum use of ATMs and help those banks which cannot fix their own ATMs at all locations.
The entire report depends on the success of Aadhaar in various parts of the country. Thinking a little cynically, it is a UPA baby and within the government, it has been facing a lot of resistance from various ministries. Already, the UPA has virtually abandoned it by delinking payments to consumers for LPG connection. It is also gathered that it might do so in respect of DFTs. It is also facing flaks from other areas and media report is to be believed that international agencies are using the database of Aadhaar. The Aadhaar team does not appear to be either refuting the complaint nor defending the robustness of the software of Aadhaar in protecting the database from getting hacked or by other means by external agencies. It is also unfortunate the author of Aadhaar, Mr Nandan Nilankeni, of late is making more political statements on Aadhaar than as a professional to protect the interest of the Indians. Perhaps, his stint of five years as head of Aadhaar project, has helped him to nurture a political ambition by aligning himself with the Congress party. In case, UPA does not come back to power post 2014 elections, the Aadhaar may not find favour with the new government (a black swan thought). See the fate of Golden Quadrilateral introduced by NDA govt and given up by UPA. In which case what will happen to the whole arithmatic on which the assessment has been made by the Committee. Even assuming Aadhaar continues, implementation of this exercise is not effective in a number of eastern and north eastern states.
RBI should require a strong Proof of Identity (POI) for each and every customer and a documentary proof of one national address but waive the requirement of documentary proof for the current address, for the purpose of opening a full-service bank account. It should instead enjoin upon banks to carry out careful tracking of usage and transactions patterns to ascertain the risk levels of the customer and take necessary action based upon risk-based surveillance processes developed internally by each bank. [Identical to Recommendation 5.2]
Good one. If accepted, it would reduce hassle for prospective customers (particularly migrants) to open bank accounts.
iii. CCFS Recomm:
Restore the permission of ND-NBFCs to act as BCs of a bank. Concerns around commingling can be effectively handled through technology-based solutions such that all settlements happen on an intra-day basis. In addition, eliminate the distance criteria between the BC and the nearest branch of the sponsor bank. Allow Banks to decide operational criteria.
Welcoming one. When BC system was introduced, RBI, had in fact allowed NBFCs to function as BCs. But, this provision was withdrawn even before the ink on the RBI circular got dried up. So, recommending this in the light of various changes taking places in the financial sector would help bring in more unbanked to the banking system. GIZ-RBF sponsored study report on MFIs as BCs also pitched for allowing NBFC-MFIs to function as BCs. So, the Mor Committee recommendation is more of seconding the recommendation already made by GIZ-RBF study on MFIs as BCs
iv. CCFS Recomm:
Reorient the focus of NABARD, CGTMSE, SIDBI, and NHB to be market makers and providers of risk-based credit enhancements rather than providers of direct finance, automatic refinance, or automatic credit guarantees for National Banks.
It appears that this is outside the TOR. To simply mention that these institutions should play the role of a ‘market maker’ is virtually closing down their existing business models and reducing them to a brokerage firm. But, the committee goes on to recommend setting up of Wholesale Investment Banks, Wholesale Consumer Banks with dependence on other institutions for funding.
While the Risk Based Supervision process has been designed for the larger and more complex institutions, a similar effort could be conceived of for the Regional Banks allowing supervisors to direct scarce on-site supervision resources to higher-risk institutions. The help of commercial ratings agencies could also be taken to formally rate these Regional Banks and provide the ratings to the depositors on a regular basis – thus including them more directly into the risk-containment process.
Basis for making this recommendation is not clear. Rating is an instrument used normally for financial products and not for institutions. Even if done, what effect will it have on the customer confidence about the RRBs? These are still owned by the government and PSBs. In addition, even commercial banks are not subject to rating. Then, why RRBs?
Multiple NBFC definitions should be consolidated into two categories: a distinct category for Core Investment Companies (CIC) and another category for all other NBFCs. Benefits that were previously available to specific NBFC types, such as tax benefits, bank limits, and priority sector benefits should continue to be available even after consolidation, on a pro-rata asset basis.
Latest on this is Usha Thorat Committee on NBFCs. But, even as RBI is rolling out implementation of its recommendations, Mor Committee has proposed for rationalizing the NBFC sector. No detailed analysis done.
vii. CCFS Recomm:
The regulatory focus must be on total indebtedness of the small borrower in relation to their debt-servicing capacity and not just indebtedness per se or merely from NBFC-MFIs. Keeping this in mind, the total borrowing limit for the small borrower segment may be increased immediately to Rs. 100,000 across all lenders, including bank-lending to this segment. In order to implement this, all lenders to this segment will need to be mandated to report to the credit bureau as has been the case with NBFC-MFIs. If total indebtedness is being tracked adequately, the stipulation of a maximum number of lenders appears redundant and can be gradually removed as this would also help in creating intensified price competition.
Malegaon Committee and the MF Bill (suspending) in Parliament have made various stipulations on the quantum of loans for an MFI client. The basis for arriving at Rs.1.00 lakh figure is not clear.
- In order to enable the gradual transition of eligible and interested NBFCs to Wholesale Consumer Banks or Wholesale Investment Banks or National Banks, the Committee recommends a re-examination of PSL definitions [also see Recommendation 4.41], creating an active market for PSL assets, assessment of the relevance of SLR in light of capital adequacy norms, and application of CRR on time liabilities.
- Since they could expect to borrow large amounts from other banks, net liabilities from the banking system will be permitted to be deducted from their NDTL computation for the purposes of ascertaining their SLR obligations on par with the treatment currently given for CRR.
One of the recommendations is questioning the relevance of SLR. (contradicting the recommendation for complete elimination of SLR under recommendation No.4.18)
But, in another place, it goes on to recommend linking it with SLR. Not clear.
ix. CCFS Recomm:
If the institution has fewer than twenty branches through which it operates, it will not be required to meet the 25 per cent branching requirement. Institutions with twenty or fewer branches could be referred to as Wholesale Investment Banks while those with a larger branch network could be referred to as Wholesale Consumer Banks.
Wholesale Consumer Banks should be permitted to act as BCs for other full service Banks.
Classifying Wholesale Investment Banks and Wholesale Consumer Banks based on the number of branches does not seem to bear any logic. If a WIB opens its 21st branch, will it be classified as WCB? Not clear.
x. CCFS Observation in the report:
Chapter 2- para 3.
Data from the World Development Indicators shows that by 2012 high income countries had attained an average Credit to GDP ratio of close to 200 per cent; middle-income countries 100 per cent (with China having crossed 150 per cent); low-income countries 40 per cent; and India as a whole 75 per cent. Based on this data and the arguments regarding the importance of credit deepening presented earlier, the Committee felt that while India as a whole may over time plan to take her credit to GDP ratio to a number above 100 per cent, in order to ensure that the absence of credit does not choke off the growth potential of an entire region of the country or a significant sector of the economy, a minimal credit to GDP ratio of 50 per cent by the year 2020, just above that already reached by even low-income countries, would be a reasonable one to aspire for.
Not clear. It mentions that in India credit to GDP is 75 per cent. It also mentions that a minimal credit to GDP ratio of 50 per cent by 2020 to be achieved.
xi.CCFS Observations in the report:
Vision 6: Right to Suitability: Each low-income household and small-business would have a legally protected right to be offered only ―suitable‖ financial services. While the customer will be required to give ―informed consent‖ she will have the right to seek legal redress if she feels that due process to establish Suitability was not followed or that there was gross negligence.
Current Status: The current system of regulations that govern the sale of financial products and services is based on caveat emptor as a doctrine. Firms do not have the requirement around Suitability today and therefore none of the envisaged processes are in place yet.
Term ‘Suitability’ is a subjective one. There are bank products suited to customers. To make a sweeping statement that it is governed by ‘caveat emptor’ may not be appropriate.
Overall, the CCFS of Mor has attempted to map what are desirable for the accelerated growth of the financial sector. But, in the process, it has left a lot of questions unanswered as ‘WHY’ of them have not been addressed. May be it may spur scope for setting up of more committees to deal with each of the recommendations. More the harder for the Regulator and the institutions to implement them. Finally, the user of financial services will continue to live from the mercy of money lenders as his cry is nowhere heard, including the Mor Committee Report.
 Dr S Santhanam PhD(Eco), CAIIB, General Manager (Retd), NABARD & Consultant-Development Finance, Pune.
Views expressed are personal.