The Mor Committee on “Comprehensive Financial Services for Small Businesses and Low Income Households” submitted its report in record time. Following the high level review in the previous blog, this one raises some specific comments on certain suggestions by the committee.
Use of Aadhaar to open accounts
The idea of the Unique Identification Authority of India (UIDAI) instructing banks to open accounts (waiving a direct application from the customer) is not well conceived. It assumes that every UIDAI registrant wants to open a bank account. A customer has to formally to apply for an account (a contract needs to be signed between the bank and the customer). This could be done without visiting a bank branch – such as authenticating with biometrics that he wants an account to be opened and authorizing UIDAI to provide the information to a chosen bank. Without an effort on the part of the customer, the legal requirements for providing a banking service are not fulfilled. In a related issue, waiving the requirement for the current address of customers will weaken the position of banks, with the current focus on anti-money laundering (AML) measures world over.
While the idea of payment banks is a constructive one, the logic of low entry capital is not clear. The permission to invest in three month securities is also not clear as one does not expect payment banks to hold on to remittances and payments for a long period of time.
The suggestion (in Para 3.11) that the telecom companies should cap their charges for the use of USSD seems to have been influenced by the potential for over-charging for these services seen in other parts of the world. But financial sector entities should be able to negotiate better rates for use of USSD from time to time. The philosophy of reasonable charges is well taken, but a specific cap on these charges is not.
State Finance Regulatory Commissions
State Finance Regulatory Commissions The suggestion of setting up State Finance Regulatory Commissions (SRFCs) is intriguing. Some states have not shown adequate maturity in regulating finance related activities. Despite the proposed membership which represents most relevant institutions, there should be formal guidance from, and linkage to, the Reserve Bank of India (RBI), and not by state government.
Convergence of regulatory norms
The convergence suggested between banks and non bank financial companies (NBFCs) in the matter of regulatory norms is welcome in principle. However the committee has recommended for continuation of the difference in current reserve ration (CRR) and denial of deposit insurance to NBFCs; these recommendations are not tenable. Banks have both asset and liability side risks – as such there is no case for lower CRR for them when compared with NBFCs, which have mostly have an asset side risk. Deposit insurance is aimed at protecting interests of small savers. By denying the same to NBFCs, the committee is breaching its design principle of institutional neutrality.
In a number of places the committee has used absolute limits (in Paras 3.11, 4.24, etc.) such as small borrower loan limit of Rs.100,000, Rs.50,000 transaction limit per customer for new payment banks, security deposit of Rs.500,000 per business correspondent (BC) agent, etc. Any such limits should not be hardwired, but set at normative levels – as a percentage of some base business parameter. Otherwise within a short time the limit will be out of date and there would be a clamour for change.
Priority Sector Lending and outreach
While banks are asked to invest in technology, branch infrastructure, establish customer service points through BCs and increase priority sector lending (PSL) to 50% in Para 4.40, how banks will remain viable is not satisfactorily dealt with. Perhaps the pricing freedom on loans is meant to help banks remain profitable. The committee has not considered the past (and current) evidence that public sector banks do not use their pricing freedom in PSL – in agriculture and small loans in particular. Further the suggestion to have a point of presence in every square kilometer – such as small kirana store or mobile recharge seller – ignoring the presence of rural post offices and Primary Agricultural Credit Societies – is bound to result in unhealthy competition in some locations and make every competing institution unviable. Even while setting up new institutions, the existing ones, which have better knowledge of the local area should be strengthened.
The section on suitability of products (starting with Para 6.1) is a welcome one. But asking RBI to issue regulations is not a satisfactory arrangement as the enforcement might suffer from a weak legal basis. As in some other countries a separate legislation on vendors’ liability – for providing suitable products and services and ensuring that these do not harm the customers – should be brought in. Such legislation will be able to prescribe the penalties for non-compliance (and means of enforcement) and remedies available to customers.
The Mor Committee’s report is full of outstanding ideas that build on the existing financial infrastructure, while challenging some of the established norms in India. If the RBI implements the committee’s recommendations, while addressing the challenges outlined in this blog, we have the very real potential of seeing significantly improved financial inclusion statistics by 2020.