Since its release on January 7, it has been heartening to see the amount of debate and interest generated by the Report of the Committee on Comprehensive Financial Services, chaired by Dr. Nachiket Mor. One strand of commentary has been on the ambitious goals laid out by the committee and the nature of implementation challenges. Given that the membership of the Committee was by and large “suppliers”, it had the good fortune of receiving a lot of practical wisdom on these issues. This post attempts to share some of that thinking.
Three elements are important to keep in mind while thinking of implementability of the Committee’s recommendations:
- the unprecedented success of Aadhaar in covering nearly half the country’s population, a target that the banking sector has not been able to achieve in decades of its existence
- the impressive gains made by the twenty-seven Pre-Paid Instrument (PPI) providers (who are not banks) licensed over the last three years in the domain of low-value money transfers using the distribution network of retailers and mobile phone rechargers and the Immediate Payments System (IMPS) platform and finally,
- the RBI’s indication of its willingness to provide licenses to differentiated banks in its Discussion Paper.
Let’s start with the historic opportunity presented by the large number of Aadhaar issuances. The single biggest barrier to opening bank accounts is establishing identity of the individual by the bank. Once the identity is established, opening a bank account is nothing but a database entry for the bank. Think of it like opening a gmail account. It involves little to no cost to the bank. The Committee felt that with some coordination between UIDAI and banks, the Aadhaar issuance process could be leveraged for bank account opening as well. The methodology suggested is as follows: a) 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 b) 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 c) the Bank would be required to send the customer a letter communicating details of the account thus opened.
The Committee’s recommendation that the RBI license “Payments Banks” has also received much attention. Several people have interpreted this to be a new idea but the fact is that today we have twenty seven Pre-Paid Instrument issuers (PPIs) such as Airtel Money and Oxigen that are not banks, who are accepting deposits and enabling account transfers. They carry out a diluted form of KYC check and maintain their account balances in escrow with a bank. For all practical purposes, they are a bank today. One growing demand from these institutions and their clients has been to enable withdrawal of these balances at a retailer point rather than at a bank branch or a business correspondent location. The Committee looked at these developments and felt that a more robust way to provide these services would be to give these PPIs full deposit and withdrawal functionality and make them safer by having them directly overseen by RBI rather than through a bank. Even if 50% of PPIs choose to become Payments Banks and scale up their money transfer services, that would have a significant impact on inclusion on that front over the next 2-3 years. The ability to carry out transactions in remote corners of the country will be enabled by the near universal coverage of mobile and broadband networks. It will provide much-needed competition and innovation to enable consumers to cheaply send and receive money to each other, an area where countries like Kenya have left India very far behind. At the same time, customer deposits will be safe because they would be overseen by the Regulator.
The third implementation enabler comes from the new direction envisaged by RBI of differentiated banks and continuous licensing. The thought process here is that rather than create several more full-service banks that are “clones of each other”, there may be value in enabling specialisation and plurality of strategies among banks. The Committee took this thought process forward in its recommendation to create Wholesale Banks for the purpose of increasing credit deepening to specialised segments such as SMEs and low-income households, a task that has been very hard for existing full-service banks to achieve. The proposal is to take interested high quality NBFCS (including MFI-NBFCs), that are already engaged in financial inclusion and priority sector lending activities but are stymied by dual regulation from state governments and the RBI, and transition them into functionally specialized wholesale consumer and investment banks. These are not envisaged to take retail deposits but will borrow from other banks and capital markets. These wholesale banks will be able to deliver on financial inclusion goals immediately without putting retail depositors at risk and the strong performers in this group could be good candidates for full-service banks in the future.
These three levers: Aadhaar-linked bank accounts, PPIs progressing into Payments Banks and NBFCs progressing into Wholesale Banks are crucial to the thought process of the Committee on how the Report’s recommendations may be implemented.
7 Responses
Bindu, you have made a brilliant summary for any layman to understand. So simple and easy are the three core recommendations to implement. What is now required is the pragmatism to implement it in undiluted manner and give a try to the three approaches the Committee has suggested. Infact Dr Subir Gokarn quoting Jim collins in his Business Standard column has commended the approach of the committee leaving aside the tough target date for achieving the goals. I loved reading the well crafted summary.Great.
Nice piece on the report. I wish those who read it will understand that its creating a simpler enabling framework to enable banking access and benefits. While some ideas may be listed specifically in the report, many others can plug in along the way. I do believe that many still come from the mind-set that government spells it all out and are upset if their favored methods (based on their experiences of course) don’t make the report. What’s more critical is whether the framework permits more ideas subject to reasonable rules on diligence and prudence.or shuts the door – the normal limitation of how rules used to be framed.
Bindu, I am in agreement with most of the recommendations. Two specific areas, I feel needs more detailing .
1. How can regulator enable these changes in policies fast so that we could see ground level work taking off very fast. Policy enablement is key to meet the timelines set in report. Even if it takes more time beyond 2016, it is still the right way to go.
2. There is general reluctance of the low income customers ( micro finance and micro enterprise profiles of the customers) to route cash through bank account. There should be a fillip to use bank account more. May be what South Korea did 20-25 years back should be tried in India. South Korea gave discount of 2-3% on all kinds of taxes for the transactions routed through cards ( banks/post office issued cards). some thing similar here in India??
Bindu.. good effort to summarise
On UEBA, I think instead of waiting for the bank to open a unique account and give a bank number, why dont we take the aadhar number itself as UEBA. The guy requires an account has to simply approach a bank with his aadhar and the bank will let the details ride in their database.
Thanks Sankar. Our thinking was similar – how to minimally add to the work that the Aadhaar has already done. For the bank to let this information ride in its database, it will have to create an account of some type but at least it will not have to re-do all the KYC associated with the account again.
UEBA and AEBA are something that is already happening. That is not new. Only that some of the really poor and cut off places such as eastern UP and Bihar which are yet to come on board the aadhaar platform and so bank account opening in such places can ride the aadhaar enrollment. Existing NBFCs progressing into wholesale banks is a logical thing. A minimum capital requirement proportional to the number of customers or balance sheet size can be proposed for such entities. Payment banks will be the real game changer. They can turn out to be the star performers among the banks in terms of financial inclusion target getting achieved.
The problem with a summary is it is not an analysis. So it misses out on the appreciation of one crucial fact. The structure of money. Money is flow as this video points out at minute 5. A cycle of flow is completed when money is extinguished. Pre-Paid Instrument (PPI) providers provide flow. So do NBFCs. Banks do not. PPIs progressing into payment banks and NBFCs into wholesale banks is a retrograde step. Watch the video:
http://topdocumentaryfilms.com/money-as-debt-3-evolution-beyond-money/