Column: Regulator, not planner

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SummaryRBI’s panel on financial inclusion confuses the central bank’s role, at great costs to the banks and their consumers

The UPA’s political agenda of inclusive growth through rights and entitlements is now being carried forward by the banking regulator, RBI, which has taken upon itself to give India growth with a human face. The central bank will now seek to become the central planner. The committee on comprehensive financial services for small businesses and low income households, headed by Nachiket Mor, has created a utopian vision of a world where rights and entitlements go even beyond what the National Advisory Committee came up with, to extend to a right to bank accounts and other financial services.

The panel’s report lays out a vision that is so precise and detailed that it reeks of central planning. The report has a vision statement around each type of financial service. Coverage targets are given along with dates and timelines extending to the next few years. For example, the panel says every Indian resident above the age of 18 should have a bank account by January 1, 2016. The credit-to-GDP ratio in every district of India is envisaged to grow to 10% by January 01, 2016, then growth at 10% per annum and reach 50% by January 02, 2020. The report says that by January 10, 2016, each district would have a total deposits-and-investments-to-GDP ratio of at least 15%. This ratio would increase every year by 12.5% with the goal that it reaches 65% by January 1, 2020.

Not suprisingly, the panel recommends that RBI issue a circular indicating that no bank can refuse to open an account for a customer who has adequate KYC, which specifically includes Aadhaar. A bank would not have the choice to refuse opening accounts, even if its business model does not permit it to do so. The panel does not say what this inclusion will cost the system. Neither does it say who will pay this additional cost. Will it be the government whose political objectives it seeks to meet, or will it be other customers, the borrowers who will pay higher interest costs and the depositors who will receive less interest? Is it in the interest of bank customers to have these costs imposed on them, or, it is it cross-subsidisation without a political mandate?

The costs imposed are effectively taxes. The opening of accounts and other intrusive, distortionary recommendations flow directly from the utopian vision. In most markets, and especially in financial markets, central planning distorts

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