The Reserve Bank of India (RBI) Committee on “Comprehensive Financial Services for Small Businesses & Low Income Households” headed by Dr. Nachiket Mor has released a report that challenges us all. It is a magnum opus of 265 pages that is surprisingly readable and builds on, and significantly extends, the 2008 Rajan Committee report to the Planning Commission entitled “A Hundred Small Steps: Report of the Committee on Financial Sector Reforms”.
The Mor Committee report is, in the Indian context at least, both visionary and, for many at least, little short of revolutionary in its approach. Small wonder then perhaps that the Economic Times notes, “bankers feel most proposals are either impractical or ambitious”. Are bankers really not just conservative, but also devoid of ambition when it comes to financial inclusion? The evidence suggests so – see for example “Branchless Banking Update: Should We Bank on Phones or the Post?”
“This Report … makes a conscious effort to redress this balance and issues of risks and costs have been kept at the very center in the discussions of each of the strategies for providing better access to financial services to small businesses and low-income households.”
The Committee’s recommendations are firmly market-led approach rather than the top-down, directives that have failed to deliver financial inclusion over the last two decades. The report recognizes that banks have business imperatives that shape their behavior much more strongly than even the most stringent diktat from the RBI or Ministry of Finance. This was most recently highlighted in 2012 when the Ministry of Finance sought to impose a cluster-led approach to driving business correspondence (see MicroSave Policy Brief #7 “Is the Business Correspondent Model in Policy Paralysis?” for a discussion of this episode).
“The danger of developing too specific or prescriptive of an approach towards comprehensive financial services is that it will become very quickly outdated and the design will begin to act as an impediment to change instead of being an enabler. … the best way to proceed would be to articulate broad principles that do not vary with financial or technological innovation but instead have a timeless character.”
However, Professor Sriram of the Centre for Public Policy at Indian Institute of Management, Bangalore and Member, Advisory Council on Financial Inclusion and Payment Systems, UIDAI, in The Mint, suggests that the Mor Committee has put all its eggs in the Aadhaarbasket. This is clearly not the case in the context of credit, where the Committee recognizes the role of NBFCs, microfinance institutions, and self-help groups. However, in the context of savings and (to some extent) risk management or insurance services, it is reasonable to assert that in the current market environment a business case can only be credible if it built on Aadhaar enabled technology. Aadhaar has the potential to remove the extraordinarily high cost of account opening and offers low-cost authentication. So the idea of creating a Universal Electronic Bank Account for all as an integral part of the Aadhaar process is an excellent one. (Of course, encouraging the use of this account will be challenging but by no means, impossible see “The Mor Committee Report – The Demand Side Conundrum”). But it is also reassuring to see the Committee recognize the limitations of Aadhaar in places with low connectivity and suggesting PIN-based authentication as an alternative as well. But it should be noted that the Mor Committee is not wedded to Aadhaar. The idea is not to make Aadhaar mandatory, but rather that it is currently the readiest and enabling platform available and can be leveraged … if tomorrow a better platform emerges, then banks should also consider that.
“The Committee recommends that authentication for the purpose of transactions happen in either of three ways:
a. Fingerprint in combination with the Aadhaar number or the bank account number (Token-less authentication)
b. One-time Password (OTP) in combination with the Aadhaar number or the bank account number (Token-less authentication)
c. PIN in combination with the Aadhaar number or the bank account number (Token authentication)
The Mor Committee has been criticised in the MicroSave LinkedIn Group for focusing on what needs to be done to achieve financial inclusion rather than the details of exactly how it should be done. And Professor Sriram also notes, “The report provides lip service to the last mile and concentrates on financial sector architecture”. But the Committee offers a sound approach to this challenge. After all, it is impossible to detail out the ways to deliver the last mile and each type of financial service provider is likely to have its own approach to doing so.
So long as there is a credible business case, it is fair to assume that the extraordinary Indian entrepreneurial spirit will find a way to deliver convenient and accessible financial services. Indeed, it is much more likely to do so when the business case is clear than when cajoled to do so by the RBI or Ministry of Finance. Now, of course, the excesses of the Indian entrepreneurial spirit were on alarmingly graphic display in the 1980s when many Non-Bank Financial Companies (NBFCs) went bankrupt – an episode seared on the consciousness of all Indian regulators. So while letting a thousand flowers bloom, the regulator will have to keep a close eye on the nursery.