RBI panel suggests separate banks for low income groups

08 January 2014  

A committee set up by the Reserve Bank of India (RBI) to go into the issue of financial inclusion and deepening of banking services has recommended the creation of special category lenders to exclusively serve small businesses and low income households.

The committee, headed by RBI deputy governor Nachiket Mor, has suggested providing universal bank accounts to all Indians above the age of 18 years and recommended a vertically differentiated banking system with payments banks for deposits and payments and wholesale banks for credit outreach with relaxed entry point norms of Rs50 crore.

The payment banks would focus on providing payment services and deposit products to its target customers, with a maximum balance of Rs50,000, in order to expand the reach of banks and achieve greater financial inclusion.

The wholesale banks would provide funds to other banks and financial institutions that directly lend to low income households.

On priority sector, the committee has recommended 'Adjusted Priority Sector Lending Target' of 50 per cent against the current requirement of 40 per cent with sectoral and regional weightages based on the level of difficulty in lending.

The committee also recommended risks and liquidity transfers through markets.

In view of the fact that banks may choose to focus their priority sector strategies on different customer segments and asset classes, the committee has recommended that the regulator provide specific guidance on differential provisioning norms at the level of each asset class.

A bank's overall non-performing assets coverage ratio would therefore be a function of its overall portfolio asset mix.

On definition of non-banking finance companies (NBFCs), the committee has recommended only two categories - one for core investment companies and another category for all other NBFCs.

The committee has advocated regulatory convergence between banks and NBFCs based on the principle of neutrality with regard to classification of non-performing assets and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 eligibility.

The committee has suggested the creation of a State Finance Regulatory Commission (SFRC), merging all the existing state government-level regulators like the regulation of NGOs, micro finance institutions and local money services business.

The committee suggested that the RBI should issue regulations on suitability, applicable specifically for individuals and small businesses, to all regulated entities within its purview so that the violation of such regulations would result in penal action for the institution as contemplated under the relevant statutes through a variety of measures, including fines, cease-and-desist orders, and modification and cancellation of licences.

The committee's recommendations come ahead of the issue of new banking licences by the RBI, as part of its efforts to improve the financial reach in a country where 60 per cent of people do not have a bank account and nearly 90 per cent of small businesses have no formal financial access.

The panel was set up by RBI governor Raghuram Rajan soon after he joined office in September.

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Bank design — horizontal & vertical

BL :Mumbai, Jan. 7:2014

The committee on financial inclusion has come up with two broad designs for the banking system in the country — the Horizontally Differentiated Banking System (HDBS) and the Vertically Differentiated Banking System (VDBS).

The framework is based on the functional building blocks of payments, deposits and credit.

In HDBS design while all configurations are deposit-taking, the variations between them are on account of: (i) the ways in which they originate risks and transmit them throughout the system; and (ii) their size and focus — whether regional or sectoral.

Six categories

The HDBS has six design categories — national bank with branches; national bank with agents; regional bank; national — consumer bank; national-wholesale bank; and national- infrastructure bank.

The rational for VDBS is usually linked to niche capabilities such as credit under-writing for specialised business segments or network management in the case of payments.

The HDBS has five design categories — payments network operator; payments bank; full-service bank; wholesale consumer bank; and wholesale investment bank.

RBI panel calls for bank accounts for all adults by January 2016

The panel, headed ex-ICICI Bank executive director Nachiket Mor, was set up 

by RBI Governor Raghuram Rajan.

IBN Live :8 Jan 2013

Mumbai: Recommending sweeping changes in the banking structure, a Reserve Bank of India panel on Tuesday suggested setting up of specialised banks to cater to low income households to ensure that all citizens have bank accounts by 2016.

It also suggested that facility for withdrawal, payment and deposit should be set up within a 15-minutes walking distance anywhere in the country.

"By January 1, 2016 each resident, above the age of 18, would have an individual, full-service, safe, and secure electronic bank account," Mor said in a report by the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households.

The panel, headed ex-ICICI Bank executive director Nachiket Mor, was set up by Raghuram Rajan on the day of taking over as the RBI Governor, to suggest steps for promoting financial inclusion.

The panel advocated setting up of 'Payments Banks' to "provide payment services and deposit products to small businesses and low-income households" with a maximum balance of Rs 50,000 per customer.

These banks can be set up with minimum capital requirement of Rs 50 crore, one-tenth of the Rs 500 crore required for full-service bank.

Permission to banks for pricing farm loans below base rate should be withdrawn, the Mor report said.

It also suggested that Aadhaar card should be used automatically opening a bank account.

The RBI is currently sifting through the application of 25 companies to get into the banking fray for which one of the key eligibility criteria is their vision for financial inclusion.

The Mor panel report said there is a need for a relook at the farm sector credit activities and suggested abolition of interest subventions and loan waivers.

The government should rather distribute the benefits directly to farmers, it said, adding that the banks should do away with the system of lending below their respective base rates to the farm sector.

Among the slew of changes on the regulatory front, it has made a case for gradual abolition of the statutory liquidity ratio (SLR), or the percentage of deposits invested in government bonds; raising the priority sector lending limit to 50 per cent, from the current 40 per cent, and allowing non-deposit taking NBFCs to work as business correspondents.

The Mor panel has set January 1, 2016 as the deadline for targets including access to formal credit as well as investment and risk management products at reasonable charges.

Financial inclusion has dominated public discourse for the last few years. The exclusion of a large part of population from formal banking services leads them to the unregulated, informal sector.

The panel said that even after the work of the past three years, close to 90 per cent of small businesses have no links with formal financial institutions and 60 per cent of the rural and urban population does not even have a functional bank account.

The panel said there is a need for a lot of specialisation and suggested at least 10 different lines of dedicated banks including one for payments, one for wholesale business, one for infrastructure and an investment bank.

It said there is a need for specialised institutions like the National Bank for Agriculture and Rural Development (Nabard), Small Industries Development Bank (Sidbi) and National Housing Bank (NHB) to be market-makers and providers of risk-based credit enhancements rather than being the providers of direct finance, automatic refinance, or automatic credit guarantees for national banks.

For the benefit of customers, the report has called for setting up a unified financial redress agency (FRA), to be created by the Finance Ministry, as a common agency for customer grievance redress across all financial products and services.

That, in turn, should coordinate with the respective regulator, it added.