Nachiket Mor: 'New banking institutions are needed current approaches not working'

Written by George Mathew | New Delhi | Updated: Jan 13 2014, 18:51pm hrs
Nachiket MorNachiket Mor has said specialised banks would serve well than each one providing every financial service.
NACHIKET MOR, Member of the Central Board of the Reserve Bank of India Central Board and Chairman of the RBI Committee on Financial Inclusion which submitted its report last week, spoke to GEORGE MATHEW on the panels proposals. Excerpts:

Do you think bank accounts for all by 2016 are feasible There is a view that this timeframe is too short

We expect to benefit from the very good work being done by UIDAI and National Population Register to give people Aadhaar numbers by December 2015. The numbers have already reached 54.37 crore individuals with about 3 crore new ones being generated every month. About 24 crore of these have asked for new bank accounts to be opened. So if they banks are willing (SBI, Axis, and Bank of Baroda have indicated that they are) then simply opening an electronic bank account for all Aadhaar holders should not be a challenge.

Are bank accounts alone enough The RBI earlier introduced no-frills accounts which never really took off How far you are optimistic this time

Clearly, just having a bank account will not be very helpful. And, it is possible that even with what we are proposing despite having opened them there will be several that will be dormant for a while. There are, however, a few thoughts we have on this issue.

Since the KYC costs relating to opening the account will effectively be borne by UIDAI and the banks will merely have to host the database entry, until the account is activated this will not be a very expensive proposition for the banks.

In the current scenario the entire cost has to be borne by the bank even if there is no activity. Since the banks, as per our recommendation, will be permitted to charge for each and every transaction (including balance enquiry), even with very low balances the accounts can become profitable. This is currently not the case.

Whats the overarching objective of the panels proposals A school of thought has it that proposals look good on paper but difficult to implement.

Given the limited amount of time we had to prepare the report to the best of our ability we have tried to recommend only ideas that are incremental in nature and build on the current momentum that is already in progress. We feel that there is strong underlying momentum in many dimensions (such as Direct Benefits Transfer, UIDAI, pre-paid e-wallets, corporate business correspondents) and with these minor changes we can achieve good impact. However, there are many ideas in the report and it will be best to discuss these concerns one at a time.

Banks, including panel members, opposed the proposal for specialised banks like payment banks and wholesale banks. What is the idea behind this proposal They say it wont any serve purpose.

There is a concern that new competitors may emerge with different capabilities and strengths who while being well regulated and supervised, may be able to move into financial inclusion spaces that are currently vacant.

Banks would clearly prefer that such competitors do not emerge and that these spaces be left vacant so that when they are ready to serve these clients they have the opportunity to do so using their own existing models. This concern from the existing banks is therefore not hard to understand and not at all surprising.

Given the fact that the unbanked population even today exceeds by a wide margin the banked population, and the overall size of the banking system itself is relatively small (in the report we provide data on this), it is clear that new banking institutions are needed, and even clearer that the current approaches are not working as well as we had originally imagined.

How will abolition of statutory liquidity ratio (SLR) help Isnt a safety net going away, which can negatively impact banks

Instruments such as SLR (we also refer to food credit briefly in our report) principally served two purposes in the past: providing a safety net for banks and funding for the governments own borrowing programme.

With the advent of Basel II (and now III) and high attendant capital adequacy requirements, it is clear that the safety need has disappeared entirely and in fact having both amounts to a double penalty on the banks directly impacting their profitability.

Now, the only need is that related to funding the government. This is not the position of the committee but that of the RBI itself and has been often repeated by the RBI.

The committee has merely supported this view and has suggested that Payment Banks with their need to invest only in SLR securities could provide a useful buffer as RBI reduces the SLR requirements and seeks to transfer them to markets.

Do you think legislative changes can delay implementation of some proposals like transforming financial institutions such as NABARD

The recommendations regarding the National Housing Bank, NABARD, SIDBI, and Deposit Insurance and Credit Guarantee Corporation (DICGC), to the best of our knowledge, do not require regulatory changes but a change in approach and the goals and the manner of functioning of these institutions. These institutions already have enormous capabilities as well. This idea is also not a new one but merely repeats an identical proposal by the Rajan Committee (2009).

The Kerala experience shows literacy level is important in achieving financial inclusion.... the country has not reached anywhere in literacy rate. Whats your view on this

Kerala has a number of high quality features and it also happens to have done well in some domains of financial access. From that it does not follow that there is a causal relationship between the two.

In general in the South, irrespective of literacy levels, there has been a high degree of financial penetration relative to the North and East. In fact, the North-East has high literacy levels but very very low levels of financial penetration. It is therefore hard to argue that literacy is either necessary or sufficient for financial inclusion.

The Indian and the global experience has been that it is very difficult to bridge the information asymmetry between the provider and the customer through financial literacy. How many educated urban households, for example, know if floating rate home-loans are better for them relative to fixed rate ones or how to manage inflation risk in their insurance and retirement planning