Nachiket Mor Committee recommendations

The “Committee on Comprehensive Financial Services for Small Businesses and Low Income Households” was set up by the RBI in Sep 2013 under the chairmanship of Nachiket Mor, an RBI board member. RBI released the voluminous and detailed Report of this committee in Jan 2014. Even though the recommendations put forth in this report have been termed as too ambitious and unrealistic by some, they have nevertheless sparked an informed debate on creating a modern, inclusive financial system in India.

Key Recommendations

• Providing a universal bank account to all Indians above the age of 18 years by January 1, 2016. To achieve this, a vertically differentiated banking system with payments banks for deposits and payments and wholesale banks for credit outreach. These banks need to have Rs.50 crore by way of capital, which is a tenth of what is applicable for new banks that are to be licensed.
• Aadhaar will be the prime driver towards rapid expansion in the number of bank accounts.
• Monitoring at the district level such as deposits and advances as a percentage of gross domestic product (GDP).
• Adjusted 50 per cent priority sector lending target with adjustments for sectors and regions based on difficulty in lending.

The committee has given its recommendations in the form of six vision statements. Following are the details of the six visions and their execution strategies:

Universal Electronic Bank Account (UEBA) by Jan 1, 2016

Possessing a bank account is an important pre-requisite to avail of financial services like loan, insurance, etc. Additionally, government also wants everyone to have a bank account so it can transfer subsidies/benefits directly to these accounts. Thus, the Nachiket committee recommends that every adult Indian (18 years and above) resident should be given a universal electronic bank account (UEBA) by Jan 1, 2016.

How will this UEBA be given?

All people above 18 years who get an Aadhaar number will be given a choice to open a bank account. He can open the account in any bank of his choice. The bank will not charge any fee for opening of account. The date fixed for provision of UEBA to all adult Indian residents is Jan 1, 2016 as it is hoped by the committee that by that date, the National Population Register (NPR) will finish issuing Aadhaar cards to all adult Indians.

Comments and Limitations

• The assumption of the committee that Aadhaar card will be issued to every adult Indian resident by 1/1/2016 is unrealistic as even till Nov 2013, only 50% Indians have been covered by Aadhaar. Thus, depending only on Aadhaar for opening bank accounts is akin to putting all eggs in one basket. Also, if some other political party like BJP/AAP/etc. forms the government at centre, it can’t be guaranteed that they would continue the Aadhaar project with same enthusiasm and budget.
• The committee wants a universal electronic bank account for every Indian but many rural and semi-urban areas still don’t have physical infrastructure or internet connection to run banking services. And thus creating these facilities by the recommended deadline of 1/1/2016 is near impossible. This objection was raised by one of the committee members itself, who recommended that Jan 1, 2018 is a more feasible deadline
• The UEBA is supposed to be given to every adult Indian “resident”, instead of adult Indian “citizen”. Thus, even illegal Bangladeshi or Nepali immigrants can open bank accounts which will result in wasteful spending of tax-payer’s money by government on opening such accounts.

Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges

The first recommendation was for opening of UEBAs for all adult Indian residents. But this step will prove useless if there is no bank branch or ATM located nearby people’s residences. Hence, the committee recommends opening of “access points” in such a way that no one has to walk for more than 15 minutes to reach such an access point. These access points would provide for deposit and withdrawal of money as well as transfer of money from one bank account to another. A host of current service providers such as post offices, retail shops, bank business correspondence agents, bank branches, panchayat office, etc. could become access points.

Limitations

In hilly areas such as Himalayas, it would be near impossible to open such access points where any person could reach within 15 minutes.

Payment banks

According to Nachiket Mor, RBI should give licenses for a new type of banks known as “payment banks”, which will be similar to the pre-paid instrument providers (PPI) operating currently. PPI can be understood with the help of an example. Airtel Money is an example of PPI. The customer deposits money into his airtel money account in exchange of which he gets a digital wallet tied to his mobile number. Thereafter, he can do shopping, pay bills, etc. through his digital wallet linked to his mobile number. So he doesn’t have to carry cash, credit card, debit card, etc. with him and can use his mobile phone only for payment.

These payment banks will provide payment services and deposit products to its target customers which will be small businesses and low income households. However, the payment banks will not be allowed to give loans. Payment banks will be allowed to start with a minimum capital of Rs. 50 crore. They will be restricted to hold a maximum balance of Rs. 50,000 per customer. Payment banks can be opened by mobile phone companies, consumer goods companies, India Post; even scheduled commercial banks can open payment banks as their subsidiaries.

So why does the Nachiket Mor committee want to establish payment banks in place of PPIs and what will be the difference between the two?

Nachiket Mor committee wants payment banks in place of PPIs because PPIs don’t give interest on the money deposited with them. On the other hand, payment banks will be mandated to provide interest on the money that people deposit with them.

Criticism against payment banks

• Instead of establishing another type of banks, the existing PPIs like Airtel Money could be mandated to give interest on money deposited with them. Alternatively, even Scheduled Commercial Banks (SCBs) could be asked to give payment services through their mobile banking platform.
• Since payment banks will not be allowed to give out loans, the aim of financial inclusion will not be served.

Sufficient access to affordable formal credit

By Jan 1, 2016 each low income household and small-business should have convenient access to regulated formal lenders that have the ability to provide them full range of “suitable” credit products at “affordable” prices. Also, to help banks give more loans to the needy sections of the economy, the committee has made various recommendations as follows:

• Abolish Statutory Liquidity Ratio (SLR) gradually and replace it with the Liquidity Coverage Ratio (LCR) that has to be maintained by banks under BASEL –III norms. Otherwise, banks will have to maintain both SLR and LCR which will leave them with lesser money to lend to people.
• Reduce Cash Reserve Ratio (CRR) by requiring banks to maintain CRR only on Demand liabilities (Savings Account, Current account, Demand draft) and not on Time Liabilities (Fixed Deposit). Currently, banks are required to maintain CRR on Net Demand and Time Liabilities (NDTL). So by not requiring banks to maintain CRR on time liabilities, the total amount of cash to be kept with RBI under CRR requirement will also reduce. Hence, banks will have more money to lend to needy people such as businesses, farmers, etc. Hence, aim of financial inclusion will be furthered.
• Increase Priority Sector Lending (PSL) targets from 40% to 50%, but with regionally differentiated targets
• Stop giving loan waiver and interest subvention to farmers: In the case of interest subvention, farmers are charged only 5% interest instead of the original 7% interest on farm loan, if the farmer repays his instalments on time. The government pays the balance 2% (7 – 5%) interest to the bank as subsidy. However, the Nachiket Mor committee recommends that if government wants to give any interest subvention to farmer, it should give it in the form of direct benefit transfer to his bank account, because interest subvention scheme is inconsistent with RBI’s base rate system. Similarly, debt waiver scheme given by the government in 2009 led many honest farmers (who had paid instalments on time) to stop paying his loan on time in the belief that government will once again launch debt waiver scheme before elections. This led to increase in NPA in the banking system. Hence, the committee wants government to stop giving debt waiver to farmers.
• RBI should give licenses for a new type of banks called “wholesale banks”: Currently, the NBFC sector in India is very small as compared to banking sector. But some NBFCs are expected to grow large in the coming years. At that time, their working without SLR and CRR requirements would not be safe for the financial system. Hence, Nachiket committee recommends a new type of banks called the “wholesale bank”, so that large NBFCs can be turned into wholesale banks and brought under the regulation of RBI.
• District-level inclusion metrics: such as credit-GDP ratio for monitoring of financial inclusion. By January 1, 2016, each district should have a credit-GDP ratio of a minimum of 10 per cent, which should be raised by 10 percentage points each year to reach a minimum of 50 per cent by January 1, 2020.
• Regulatory convergence of NBFCs with banks: Regulation of NBFCs should be similar to that of banks in certain respects such as duration to qualify for NPA, definition of sub-standard asset, eligibility for SARFAESI. These are further explained below:

Universal Access to a range of deposit and investment products

If someone deposits his money in a fixed deposit, he gets return of 8-9% per annum. But the Consumer Price Index (CPI) in India itself is between 9-11%. Thus the inflation is higher than the money a person can earn from bank deposit. The committee has recommended various measures such as provision of a range of products such as inflation indexed bonds, mutual funds, National Pension System, etc. to help protect people’s earnings from being eroded by inflation. In each district, by January 1, 2016, there should be a minimum total deposits plus investments to GDP ratio of a minimum of 15 per cent which should be increased by 12.5 percentage points each year to reach a minimum of 65 per cent by January 1, 2020.

Universal Access to a Range of Insurance and Risk Management products at reasonable charges

By Jan 1, 2016 each low-income household and small-business should have access at a reasonable price to a range of insurance and risk management products, related to: a) commodity price movements; b) life and disability; c) death of livestock; d) rainfall; and e) damage to property.

Right to suitability

Each low-income household and small-business will have a legally protected right to be provided only “suitable” financial services. They will have the power to initiate legal proceedings against the financial service providers if they find that suitability was not established by following due process.

Explaining this in more detail, the Committee report says that the “caveat emptor” principle for consumer protection has not produced the desired results in India. This principle means that the buyer alone is responsible for checking the quality of goods that he purchases. Hence, the committee believes that India needs to move to a regime where the financial service provider itself makes sure that the product or service being provided is as per the needs and suitability of the customer.

The customer would also have access to speedy grievance redressal mechanisms, for which grievances would be sent to grievance redressal centres located in each district.

Observations on Nachiket Mor Committee Recommendations

We all know that the central bank has put special emphasis on the Financial inclusion for the last few years and has made efforts to bring large numbers of people into the system. However, the major issue is that this numbers game does not result in meaningful financial inclusion. Thus, financial inclusion has been more a slogan than an achievement. The Nachiket Mor committee takes ahead that number game only by seeking to change all that in next two years. Its notable recommendations include three sets of instruments:

Increase the Priority Sector Lending Mandate

The Mor committee has recommended that the priority sector lending mandate for banks should be raised from the current 40 per cent to 50 per cent. At the same time, the banks must be freed from all pricing and other restrictions. Thus, the committee means to say that the banks will evaluate these borrowers and price loans to them exactly as they do to other borrowers. When banks are given freedom to price their credit, they would be able to compete effectively with other channels and would effectively contribute to achieving the penetration objective.

Allow differentiated Licenses

The committee has taken ahead the case of differentiated banking licences. It has proposed that three new categories of banks viz. payment, wholesale investment and wholesale consumer should be allowed. At the same time, the regulations for non-banking financial companies, or NBFCs should be streamlined. The biggest problem here would be the business viability of such banks. One example of differentiated banking license is Regional Rural Banks, which were started off with great promises but ultimately broke down.

Meaningful Financial Inclusion

The Nachiket Mor committee has suggested two specific district-level penetration metrics viz. the credit- GDP and life cover-GDP ratios to monitor the meaningful financial inclusion. This is a slight departure from the number of accounts formula of financial inclusion. It is a meaningful recommendation and must be taken ahead.