The Report of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS) was submitted to the Reserve Bank of India (RBI) in January this year. In the eight months that have passed, the RBI has accepted a number of the report’s recommendations including publishing of draft guidelines on licencing of payments banks, extending the right to suitability to customers of financial services, relaxation of Know Your Customer (KYC) norms, and restoring permission of ND-NBFCs to act as BCs of a bank, among others. These steps, in sum, represent the renewed vigour and focus on the financial inclusion and financial deepening agenda in the country. As we see progress on individual recommendations, however, it is important to keep in mind some of the larger themes and directional shifts that the report had recommended and to view each recommendation within the context of these.
The starting point for the report, in many ways, was to take stock of the previous and existing efforts on financial inclusion in the country. Over the years, India has seen many big ideas on financial inclusion; from cooperative banks, nationalisation of banks, self-help groups, and regional rural banks to business correspondents, India has moved from one big idea to another in addressing the country’s financial inclusion puzzle. In examining these programs, the CCFS recognised that the key, common weakness of previous efforts on financial inclusion was their over-reliance on the one big idea as the key to financial inclusion. In this light, the recommendations of the CCFS mark a significant break from the trend of “magic-bullet” solutions. The report recognises that in a country as large and diverse as India, a reliance on any single approach to solve problems is bound to fail. While acknowledging that the country will need to constantly explore new ideas, learn from new technology and successful strategies of other nations, the report argues that the best regulatory strategy is not be to push the design of the financial system towards one central approach. Rather, the CCFS proceeds to define a clear set of vision statements and establish core design principles that would enable multiple institutional frameworks and models, new and old alike, to thrive or wither away, based on their inherent strengths and weaknesses. (Page 5, Preface, Report of the CCFS)
Keeping in with this strategy, the report presented a set of four principles that should guide the evolution of the financial system design in India – Stability, Transparency, Neutrality, and Responsibility. To elaborate, the principle of Stability argues that 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. Furthermore, 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. Lastly, 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.
In articulating these design principles, the report argues that any institutional model for the delivery of financial services should be encouraged as long as it passes the litmus test of adhering to these principles.
Let a hundred flowers bloom
At its core, then, the CCFS recommends an approach that moves away from an exclusive focus on any one model of financial inclusion and financial deepening to an approach where new and specialised entrants are permitted and multiple models and partnerships are allowed to emerge between these specialised entities. The recommendation on allowing NBFCs and now, payments banks to act as BCs of banks, perhaps, best represents fruitful partnerships among specialists. Thus, instead of focussing only on generalist institutions that are required to deliver on all functions of finance, the report recommends developing a vertically differentiated banking structure, in which banks specialise in one or more of three functions- payments, credit delivery and retail deposit taking. The Committee, thus, recommended the licensing of new categories of specialised banks including Payments Banks and Wholesale Banks.
As the report mentions, India already has the elements for success in place – a wide range of institutional types, well-developed financial markets, a good regulatory framework, and large scale and high quality authentication and transaction platforms. The cause of financial inclusion and financial deepening would be better served if we could allow institutions to leverage on this and evolve naturally, in multiple directions.