Our picks (in reverse chronological order):
Suitability becomes a Customer Right:
The RBI published the final Charter of Customer Rights for banking customers in December 2014. This Charter has introduced the Right to Suitability for all banking customers, in addition to the rights to fair treatment, transparency, privacy and grievance redressal. While all other rights have been captured to varying degrees in current customer protection rules and banking industry codes, the Right to Suitability has been enshrined by the RBI for the first time for retail customers of banks. The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS) had recommended that ‘every low-income household and small business must have a legally protected right to be offered only ‘suitable’ financial services’. The RBI has in its press release, also pointed out that all scheduled commercial banks, regional rural banks and urban cooperative banks are expected to prepare their own board-approved policy incorporating the five Rights of the Charter, and that such a policy must also contain monitoring and oversight mechanisms to be followed for ensuring that rights are not violated. This will pave the way for customer protection to shift from being an ex-post redressal process at the Banking Ombudsman along with self-regulation through industry bodies, to becoming an ex-ante prerogative of the Boards of banks.
Payments Banks become a reality:
The RBI published the final Guidelines for Licensing of Payments Banks in India in November 2014. The CCFS report had proposed developing a vertically differentiated banking structure, in addition to the horizontally differentiated model in place currently, in which banks specialise in one or more of three functions- payments, credit delivery and retail deposit taking. The Committee recommended licensing of new categories of specialised banks including Payments Banks that would be engaged in collecting demand deposits (ie, savings bank deposits and current deposits) and provide payments and remittance services, but not credit services. The RBI Guidelines state that the “primary objective of setting up of Payments Banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology driven environment”.
Guidelines for Licensing of “Small Banks”:
With a view that small local banks can play an important role in the supply of credit to micro and small enterprises, agriculture and banking services in unbanked and under-banked regions in the country, the RBI in November 2014 issued guidelines for licensing of “Small Banks” in the private sector.
Pradhan Mantri Jan Dhan Yojana:
In August, the Prime Minister announced the Pradhan Mantri Jan Dhan Yojna (PMJDY) programme in his first Independence Day speech at the Red Fort. Launched with a mission to provide universal access to banking facilities, the program has brought unprecedented spotlight on the financial inclusion agenda. As of 24 Dec 2014, 100 million bank accounts have been opened under the PMJDY. In its first phase (15 August 2014 to 14 August 2015), the PMJDY aims to cover all households with at least one Basic Banking Account with RuPay debit card, accident insurance cover of Rs.1 lakh and an overdraft facility of Rs.5000 permitted in Aadhaar-enabled accounts. In its second phase from 15 August 2015 to 14 August 2018, the scheme expects to provide micro-insurance and pensions.
‘In-principle’ approval of Bank Licenses to IDFC & Bandhan:
From amongst a pool of 25 applicants, RBI shortlisted the two applicants to set-up full-services banks in India. These institutions have been given a time frame of 18 months to comply with the Guidelines of RBI, following which the RBI would consider granting a licence for commencement of banking operations. Terming its approach as conservative in this round, RBI has indicated that it intends to use the learning from this licensing exercise and issue subsequent licenses “on-tap” going forward.
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2 Responses
These are certainly important changes. However, in my view just creating new institutions, while helpful, is not going to necessarily “change the game” but instead efforts that enable specialists to partner with each other will. In that context allowing MFIs to become BCs to my mind is an important move since it finally allows long-term partnerships to evolve between aggregators and originators with, hopefully, proper sharing of risks and rewards. However, for these partnerships to fully realize their value, the partners will each have to take a long-term view and build a relationship and move away from purely transactional conversations. in this context a specific area of concern to me are the large profit margins being retained by commercial banks when they lend to MFIs at 16% instead of at or near their Base Rate.
I totally agree with Mr. Nachiket. Our social enterprise experience with a special focus on gender centric innovation and poverty eradication underlines the need of improved financing model by MFI ie they might need to redirect their lending towards poor with a stronger focus on livelihood. And commercial Bank should recognize it and create a positive ecosystem. RBI might play an important role here as well.