The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, set up by the RBI in September 2013, was mandated with the task of framing a clear and detailed vision for financial inclusion and financial deepening in India.
In its final report, the Committee has outlined six vision statements for full financial inclusion and financial deepening in India:
- 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.
The Committee lays down a set of four design principles, namely Stability, Transparency, Neutrality, and Responsibility, that will guide the development of institutional frameworks and regulation for achieving the visions outlined. Any approach that seeks to achieve the goals of financial inclusion and deepening must be evaluated based on its impact on overall systemic risk and stability, and at no cost should the stability of the system be compromised. A well-functioning financial system must also mandate participants to build completely transparent balance sheets that are made visible in a high-frequency manner, accurately reflecting both the current status and the impact of stress situations on this status. In addition, the treatment of each participant in the financial system must be strictly neutral and entirely determined by the role it is expected to perform in the system and not its specific institutional character. Finally, the financial system must maintain the principle that the provider is responsible for sale of suitable financial services to customers, and ensure that providers are incentivised to make every effort to offer customers only welfare-enhancing products and not offer those that are not.
At its core the Committee’s recommendations argue that in order to achieve the vision of full financial inclusion and financial deepening in a manner that enhances systemic stability, there is a need to move away from a limited focus on any one model to an approach where multiple models and partnerships are allowed to emerge, particularly between national full-service banks, regional banks of various types, non-bank finance companies, and financial markets. Thus, the recommendations of the Committee seek to encourage partnerships between specialists, instead of focussing only on the large generalist institutions.
In the spirit of the RBI’s approach paper on differentiated Banks, the Committee recommends that the RBI may also seriously consider licensing, with lowered entry barriers but otherwise equivalent treatment, more functionally focussed banks like Payments Banks, Wholesale Consumer Banks, and Wholesale Investment Banks. Payments Banks are envisaged as entities that would focus on ensuring rapid out-reach with respect to payments and deposit services. The Wholesale Consumer Banks and Wholesale Investment Banks would not take retail deposits but would instead focus their attention on expanding the penetration of credit services. The Committee also recommends that the extant Priority Sector Lending norms be modified in order to allow and incentivise providers to specialise in one or more sectors of the economy and regions of the country, rather than requiring each and every bank to enter all the segments. Finally, the Committee proposes a shift in the current approach of customer protection to one that places greater onus on the financial services provider to provide suitable products and services.
To read the full report click here.
In the coming weeks IFMR Finance Foundation will analyse different aspects of the report as part of a blog series.
25 Responses
Amazing vision! It would be interesting to see how enabling these vision statements and framework will be in financial deepening and financial inclusion. Govt should make it mandatory to have a bank account for all citizens and make it as fundamental duty of every citizen.
Thank you for your comment. The Committee’s approach has been one that assumes that notwithstanding demand side adoption and usage, the aim is for the supply side to make possible access to bank account facilities.
Radical Aspirational Ambitious proposals.. Aadhar will become the base on which identity will be determined for financial transactions. And any entity involved in offering a financial service will finally be regulated by the RBI. A deadline of 2 years to make this far-reaching changes to the banking landscape in India seems optimistic, but even if half of the recommendations on retail payments are accepted and started, it would be revolutionary.
Thank
you for your comment. We hope that the recommendations placed by the Committee
would be deliberated upon and acted on by the RBI.
I would say that the “The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households” has come out with a pragmatic,practical and purpose oriented solutions to the un-banked populations. Quite admirable and path breaking approach. Now the action moves to the Power structures-RBI and the Central Govt to enable an environment for different players to operate to make available all the financial services as outlined in the report. A big way forward in the Inclusion paradigm. I salute the committee for their path breaking approach and suggestions.
Thank you for your comment.
The report toes the lines of NAC and has nothing but jargon. For it, inclusiveness has come to mean ‘I include you’. It should have considered empowering panchayats and mohalla samities to decide who amongst them needs the finance. Again, instead of bringing the established ‘providers’ of insurance and risk management to do business, it should have considered panchayats and mohalla samities to take care of each other in any crisis. The deposits and investment should carry standard return all over India, lest some unscrupulous organisations cheat people. Similarly credit rates for small businessmen/ households should also be same all over India to save people from being cheated. Not only bank accounts should be in electronic form but all transactions, big or sundry, should also be recorded electronically. Last but not the least, have the report established that the present system is not stable, transparent, neutral and responsible to harp on these idea as something innovative they have provided?
Thank
you for your comment. The Committee’s mandate is restricted to the challenge of
access to services offered by the formal financial services sector. The
consumer protection concerns you have raised are very relevant and central to
the Committee’s Report. The recommendations regarding Consumer
protection (Section 6 of the Report) require that
the onus for consumer protection shift from the buyer to the seller of
financial products through a legal liability on the seller. The
shortcomings of the current financial system in reaching the financially
excluded are acknowledged by the Government and the financial sector
regulators. We are hopeful that the Committee’s report will help RBI in furthering financial inclusion and financial deepening.
Covers the supply side very well, but with a welfare approach. Vision and recommendations could have had an ’empowerment’ focus, e.g., why is a vision of Universal Financial Literacy not included? Why is “equity” not a concern to be addressed at various levels – e.g., why the exclusion of women in low-income households not highlighted?
Thank
you for your comment. The Committee while recognising several demand side constraints, has focused on ways to dramatically improve the supply side
offering. Regarding your concern with financial literacy, the Committee concludes that financial literacy as the dominant approach to financial
inclusion, has not been effective enough in many ways (Page 172 of the Report
elucidates this point). The Committee therefore recommends placing a legal
liability on the provider to ensure that all its employees and representatives
keep the customers’ interests in mind and advice and sell only those products
and services suited to the customer’s needs, objectives and financial situation
(Chapter 6.2 of the Report). This will pan out in the form of a Board approved Suitability process that all employees and agents of financial providers follow
and are held liable for.
Congratulations for the brilliant effort. I have three questions: 1.How quick would RBI issue advisory/circular to banks on implementation side. Actions specifically on WL-BCs and 3.14% of commission to banks( for G2P) .
2.if capitalisation question is addressed , is there a room for a full fledged BC Bank of India with millions of distribution points ( somewhat like as payments bank),
3. Why is the report silent on the use of NABARD’s FIF and FITF, after all RBI does contribute to these funds?
Thanks.
Thank
you for your comment. The recommendations of the Committee would be deliberated
upon by the RBI and the RBI will take a final decision on these matters. Regarding your query on NABARD, the Committee has sought a much larger scope
for Development Finance Institutions such as NABARD, SIDBI and NHB in financial inclusion, by becoming market makers and providers of risk-based credit enhancements, and not just restrict themselves to their current activities that
depend on their limited resources for direct finance and refinance among others
(Page 99 of the Report covers this aspect).
Financial Inclusion (FI) is Meaningless without Substantial Financial Literacy (FL) and Capacity Building at the Grass-root. However, FL should not be considered with a typical classroom approach, instead,most effectively and efficient use of ‘Teachable Moments’ – ‘that moment when a unique, high interest situation arises that lends itself to discussion of a particular topic’. The time at which learning a particular topic or idea, say, opening and using banking account becomes possible or easiest.
The Madhya Pradesh FI Model- Samrudhhi (Prosperity), typically provides for G2P payments landing directly in the beneficiary accounts (DBT) opened at the USB / CSPs. Its Three Pillar approach has created an institutional architecture that is sustainable for the bankers and provides a win win situation to the GoMP on delivery of benefits; financial viability for the BC / USB / CSPs as frequent G2P transaction occur and customers alike, who receive their benefits such as MNREGS payments, pension etc. in their individual bank a/c located within 5 kms from their house. The three pillars constitute a SSSM (Samagra Samajik Suraksha Mission) that has built a common data base of the entire population of MP that would enable to identify individuals and also the family data. to throw up the entitlements. The second has developed a conduit for devolution and transfer of funds. This conduit is developed to ensure devolution to even non-core banking institution like Coop bank and POs. The e-FMS has been developed to transfer funds from Single bank account directly from treasury to beneficiaries’ account that may be in core or non-core banking. The Third Pillar facilitates the financial dispensation facility accessible in order to realize the concept of FI in a holistic manner. Thus, a well-considered norm has been developed to have facility in a radius of 5 km. Areas have been mapped and those devoid of the facility have been marked as ‘Shadow Areas’. Till date 1761 such facilities USB (Ultra Small Bank) have been provided as a business model.
The channels are now available and the infrastructure fully functional from the ‘supply side’. Now there is a need to activate the ‘demand side’ for financial deepening which is possible by creating awareness through ‘teachable moments’ and offer diversified products like Savings, Credit, Remittances, FD, RDs, NPS Lite (Swawalamban) etc. so that full advantage of the FI model could be utilized by the rural and urban laborers.
Thank
you for sharing with us the experience with Madhya Pradesh. While DBT through bank
accounts is a very important policy objective, the Committee has taken a
broader view of financial inclusion to mean access to not just bank accounts
but also credit, remittances, insurance, investments, and pensions. Given the
complexity of financial products and the nature of their interaction with the
cash flows of the households, it would be very difficult to bridge the
information asymmetry between the provider and the customer through financial
literacy. The Committee recommends placing a legal liability on the provider of
financial services to ensure that it only sells products that are suitable to
the customer’s requirements, objectives and financial situations. However, the Committee also realises that while
Suitability should be at the core of customer protection, there may well be a
need for specific financial literacy strategies, such as the ‘teachable
moments’ you talk about, that can actually benefit the customer.
1. The committee report (Nichiket Mor) on comprehensive financial services focuses more on designing the institutional mechanism to include low income and small business people. Invariably delivery of financial services through electronic medium has been highlighted for covering all 18 years old and every resident with 15 minutes walking distance of payment access point for full financial inclusion and financial deepening from supply side perspectives. The conceptual framework for financial inclusion of small business and low income clients is more suited to western countries (USA & Europe) Where as in India case, with given demographic of excluded in rural area and skewed infrastructure development for effective absorption of financial services in rural area from demand side perspectives , the fulfillment of committee vision of full financial inclusion and financial deepening would be difficult. To wit the approach for responsible full inclusion of excluded ( 51.4% of farmers housel holds excluded – Dr C.Rangarajan committee on financial inclusion)) requires analysis more on demand side realities and recommendations based on such facts. It should be born in mind that despite implementation of plethora finance committee recommendations ( no scarcity in India) , rigorous reform measures and liberalized multi agency approaches for rural lending and credit policy guidelines for priority and weaker sectors lending including lead bank and service area approach at village level, formal financial inclusion was made possible only about 49% of farmers HHs.. Both Regional Rural Bank and Cooperatives with the extensive network in rural area have also failed to ensure full financial inclusion and bottom poor persistently remain excluded. Evidences also reveal the limitation of electronic based financial services ( the means ) for full inclusion in remote areas with poor connectivity among others.( Not to mention on NBFC/MFI multiple lending , Monopoly of undisciplined micro credit and MF crisis and clients suicides in AP and elsewhere). The lesson- institutions and delivery mechanism are only means that may help for inclusion but it cannot become the ‘end’ which depends on working of financial services after inclusion or after access in the demand side.
2. In the above context it merits mention that the earlier committee on financial inclusion chaired by Dr C.Rangarajan (2008)has prudently researched on demand side factors and highlighted the demand side causes and solution for financial inclusion in chapter XII in the report ( page 106-112). Based on the demand oriented factors National Rural financial inclusion plan has been indicated. In page 106 to quote “ Merely pumping a backward region with financial capital is not going to be enough in the absence of improvements on the side of human, social and physical capital.” In the absence of all this, merely insisting on financial inclusion will not work”
3. The latter report clearly indicates responsible full financial inclusion and financial deepening focusing more on ‘ the end’ perspectives from demand side regardless of the means ( the institutions and delivery mode) Mor’s report also runs.
Dr .V. Rengarajan
Thank
you for your comments. As you rightly pointed out, the Committee has been of the opinion that the demand for high-quality financial services is not a
constraint and that the challenge that the Committee must lend itself to is in
addressing the supply side challenges in financial inclusion.
Thank you Rachit for your positive response. However I wish to make it clear that from the perspectives of excluded cohort in the demand side, there is a need for identification of appropriate products and services and sequenced delivery of them in a manner that suit them in the last mile. which still remains a constraint. This does not require ‘high- quality financial services through electronic media which other wise lead to further exclusion of the bottom pyramid (lessons from M pesa, Jipangi ku sav –Kenya CGAP study) The committee need to take cognizance of the limitations of tech based services to the excluded community in the demand side in the process of financial deepening & inclusion.
I have the following questions in my mind, which I think the committee needs to focus for implementation of all good thoughts in the report :
a) Is the focus of financial inclusion shifted from access to financial service from all households in the country to all individuals above 18 yrs of age
b) The major share of target population lives in rural india & therefore whether all efforts are focused in the context of rural india.fic
c) How the committee proposes to handle the problem of lack of infrastructure, viz rural telecom connectivity, rural roads and access points which are miles away now and for which the financial inclusion programme suffered a set back
d) In regard to access to credit – what happened to the fate of KCC to all farmers, lending to women SHGs except in few states, the learning can be valuable input for the committee
e) investment & insurance- the regulatory requirements of the respective authorities unless amended such products cannot be offered to large population. Presence of insurance offices are too few to extend coverage to rural population. Present schemes of crop and livestock insurance can the committee change?
well these are the issues to begin with, hope the committee interacts with the practitioners in the operational field more, than just drawing up plans from plush offices.
Thank
you for your questions. The Committee report has attempted to address many of
the concerns you raise. Making a departure from existing bank-led financial inclusion efforts where all providers need to follow a single strategy, the
report envisages a design where there is more freedom to evolve highly
specialised institutions each with strengths in catering to specific sectors or
asset classes, and a high degree of collaboration between such institutions to
achieve the objective of financial inclusion for
excluded households and businesses in both rural and urban areas. By allowing
providers to offer a variety of products through a single front-end office and
by relying on a unified KYC process across regulators, it is indeed possible to have a channel through which products suited to such households and businesses
may be created and sold.
Dear Anand
Following points may be useful to the forthcoming conference on FI and BC at CAB/RBI in Pune
In Indian context, the starting point for financial inclusion or deepening financial services is to discern prudently the profile of the excluded in the ‘ last mile’ from demand side perspectives and design appropriate integrated products and services and appropriate means of delivery
For addressing the ‘last mile’ prudent appreciation of its profile holistically is an essential prerequisite for which mere electronic delivery and designing the structure would hardly bring the desired outcome of responsible financial inclusion.
In this regard India perhaps is the richest country with plethora of committees in Indian finance sector which has brought out valuable reports with wealth of information for outreaching the ‘last mile’ since 1954 (RBI’s All India rural Survey Committee AIRCS) . All the reports shows the meaning full path for financial inclusion and deepening although not hyped with the term like “Financial inclusion and financial deepening “ ( Old wine in a new bottle)Among them, outstanding ones with an anatomy on both demand and supply side realties portraying the profile of rural in general and last miles in particular, include
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) 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)
7) Dr.C.Rangarajan Committee on financial inclusion (2008)
In particular, the reports of CRAFICARD, ACRC and the last Rangarajan’s committee on FI portrays in depth the profile of last mile and show prudent pathways for responsible inclusion . Credit goes to RBI/GOI. But at the same time we have enough scholarly reports and enough lessons. Enough is enough . Hope these valuable findings from these reports are more than enough to see the light at the end of tunnel(last mile) , Trust the forthcoming conference at CAB//RBI takes cognizance the above fact.
In fine, it merits the attention of experts to note that finance being a non direct input , is necessary but not sufficient for holistic human development. India need sequentially mobile health care, mobile education , mobile drinking water, mobile toilet .mobile food (PDS) mobile nutrition, mobile phone etc., and followed by mobile finance in the last. Putting the last first in the name of financial inclusion is putting the cart before the horse. ‘Appropriateness’ and ‘Sequencing’ matter seriously in the FI vision and mission
Thank you for sharing my views
Dr Rengarajan
Two points:
1. One is ensuring a bank account for all those above 18 yrs by 2016. It is altogether another matter as to how will banks/financial institutions ensure their continuity as live accounts. Today’s newspaper (13 Jan ) bring out an ad from SBI 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 poor fellows 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.
2. 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. In case, UPA does not come back to power post 2014 elections, the Aadhaar may not find favour with the new government. See the fate of Golden Quadrilateral introduced by NDA govt and given up by UPA. ( a black swan thought). 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.
Dear Santhanam
I agree your points whcih are very valid from demand side perpectives . These are hideen social costs of so called financial inclusion through electronic medium not prudently perceived in a given commercial oriented market and regional imbalnce in economic growth.
RBI Can Bring the Horse to Water, But Can’t make him Drink. U need to do Different Things Differently.
Are We as Usual ‘fighting the wrong battle’ – the battle from the ‘supply side’? Who would do what FI and Why? What would be the norms and who would regulate it? What would be the role of each of the (supply side) player viz Banks, Post Office, Mobile Money, Cards etc. and What all product mix etc. etc. Development sector has infinite examples where the supply side has only negatively dented the structures and have seldom made any impression on the impact of the socioeconomics. Supply seldom creates its own Demand unless the consumers are aware of the benefits of the products and services. Has anyone gone to the trenches and identified as to What do THEY Want?? And if they don’t want but just Need it, then how do we get the ‘Need’ Converted into ‘Demand’? For example, everyone on this planet need a ‘Pension’ to fight old age poverty, but what is the ‘Demand’ for such products?
Only Financial Literacy and Capacity Building at Grass-root Can make the Horse Drink.
Details at:
http://kavimbhatnagar.blogspot.com/2014/01/rbi-can-bring-horse-to-water-but-only.html
Thank you for your comment. While financial literacy may seem like a good approach to create empowered customers, evidence (from India and globally) points to the weak relationship between financial literacy and financial behaviour (Pg. 172 of the report). For e.g., studies have found that even after intensive sessions (lasting up to 2 days), there is no impact on the customer’s financial behaviour. Like other education, financial education also decays over time. This is precisely the reason why countries like Australia (and UK, USA to a lesser extent) have moved towards Suitability as an approach to customer protection (Pg. 173). The high level of expertise required to understand financial products and services will always mean that the provider will know more than the customer. Financial Literacy is an ineffective tool to bridge this knowledge-gap.Therefore, the Report argues (in the spirit of the FSLRC report) that the customer must have the Right to Suitability and that the onus of customer protection should be placed on financial service providers instead (Page 188).
On August 27, 2013 the Reserve Bank put
on its website a policy discussion paper on Banking Structure in India –
The Way Forward. Among the findings within the discussion paper was
that there’s an need for niche banking in India, and classified
certification might be a desirable part of this direction, designed for
infrastructure financing, wholesale banking and retail banking. Further,
the Committee on Comprehensive Financial Services for Smaller
Businesses and occasional Earnings Homes (Chairman: Dr. Nachiket Mor) in
the report launched in The month of january 2014 examined the problems
highly relevant to an ubiquitous obligations network and universal use
of savings and suggested, inter alia, that because of the difficulties
being faced through the pre-paid Payment Instruments Companies (PPI
companies), and also the underlying prudential concerns connected with
this particular model, the present and new PPI company candidates should
rather be needed to try to get a payments bank licence or become
Business Correspondents (BCs).
With this particular backdrop, it
might be interesting to determine how RBI examines these new applicants.
One particular set is pairs like Reliance with SBI and Airtel with
Kotak. These individually too are very large and experienced. However,
their uniting is perplexing. When the underlying argument from the
policy was / would be to overcome the problems faced by PPI companies
and among the greatest representation all mobile operators make to RBI
would be that the requirement of a PPI / Mobile operator to tie-down to
financial institution with regard to completeness of offering slows
lower innovation and scale on the market, these king of alliances are
counter intuitive.
The 2nd contradiction appears to become wrt
the BC players eg FINO Paytech, Vakarangee, who’ve no training of
payments market. What exactly are these BC palyers doing in payments
space? May be the BC concept is completely dead? Will banks no more have
BCs? Can there be there is no need of BC left? Or perhaps is it more
popular now to become a payments bank than the usual BC. What’s the core
of those companies when it comes to technology, management, procedures
abilities associated with digital obligations space? do they have any
offerring meaningful for the customer or is it only about their
valuations?
Although some other BCs like Oxigen and Suvidhaa
might also fall within this category however they have a minimum of
attempted some choices within the obligations space although it hasn’t
succedded.
What exactly is RBI searching for? Opening the marketplace for significant gamers or simply ticking the boxes?
The
big gamers have actually the capacity to create scale. After which you
will find many with good reputation for innovation and experience of
payments space. The way RBI treat these opportunistic Me Too players
will probably be the most crucial point. In my view the assessment is
likely to be for that customer convenience, cost and innovation and not
to push-up valuation of the couple of redundant but aspirational players
who are likely to pull all stops within their race to obtain the
license, come what may.
Our regulator happens to be conservative and sensible. These players forget!!