MONTHLY ARCHIVES: FEBRUARY, 2014
With the RBI Governor drawing attention once more to the use of technology in achieving inclusive growth, the latest MMU’s State of the Industry Report shows that mobile money services are catching up across the world: 110 deployments across 56 countries responded to the 2013 survey (up from 78 deployments in 2012 and 52 in 2011)India can use the experiences from other countries, drawing its own appropriate lessons.
The key data points as revealed by the survey are as follows:
MMU predicts three developments in 2014:
In 2013, Indonesia was the first market where three operators – Indosat, Telkomsel and XL - enabled their mobile money schemes to directly transfer money in real-time between each otherGiven how there are already 52 markets which have 2 or more mobile money services, MMU expects that more markets may also seek to interoperate their mobile money platforms, once they have identified the right technical and commercial models to do so successfullyThere is also an opportunity for mobile money services to connect with more traditional financial services, enabling transactions and new products between bank accounts and mobile walletsMany deployments have already started to integrate their services in this way, and we anticipate that many more will follow.
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The Nachiket Mor Committee recommends the creation of Payment Banks as a step towards using the strengths of non-banks in payments and remittances, to raise access to financial services amongst the unbanked.
The concept of Payment Banks is perfectThis allows existing Non Bank Pre Paid Issuers (Non Bank PPI’s), already licensed by the RBI, to apply for such a license.
Here are a few thoughts from a Non Bank PPI perspective (there are more than 20 such non-banks providing payment services since the RBI allowed non-banks as Pre-Paid Instrument Issuers (PPIs) in 2009)Some points to begin with:
The Mor Committee recommends the following: "Given the difficulties being faced by PPIs and the underlying prudential concerns associated with this model, the existing and new PPI applicants should instead be required to apply for a Payments Bank licence or become Business CorrespondentsNo additional PPI licences should be granted. This may work for new applicants but forces existing PPIs to rethink their business model, and may push out some with considerable valuable operating experience, first mover risk taking, network aggregation & innovation.
One recommendation that ties in with this ‘fear’ of losing some players concerns the minimum capital requirement: "In view of the fact that they will therefore have a near-zero risk of default, the minimum entry capital requirement for them will be Rs50 crore compared to the Rs500 crore required for full-service SCB.
Why Rs50 crore is not explained in the report.
Currently there are no capital requirements for PPIs, so there should be some justification for making the jumpWhy not an instead have a capital limit of say Rs 25 crores for Payment Banks?
The need for initial capital and prudential norms is accepted: a reasonably well capitalized company can ensure proper governance, compliances, technology, customer complaint redressal, professional management and fiduciary obligationsToo low a capital requirement can bring in fly- by- night operators, a high one may run the risk of a greater tendency towards innovative financial engineering & accountingBut the Rs50 crore capital requirement for both Payment Banks and Wholesale Banks (which have a wider mandate, role and a credit-spread based business model) has been put for both Payment Banks and Wholesale BanksThis seems a mite unfairWhile Payments Banks can hold maximum balance of Rs50,000 per customer, Wholesale Banks can accept deposits only greater than Rs5 croreWhile Payments Banks cannot issue credit, the primary role of Wholesale Banks is lending.
Payment Banks will definitely have a cost structure which is much more economical as compared to Wholesale and SCB’s based on its lower human resources and physical asset costs, use of technology and lower risk profileWhich all lend itself to its transactions-based business modelSo could very well do with a lower capital limit.
What would instead be more rational, again following the European Union Standards is to have a tiered system that will allow small and large firms, banks and non-banks to provide services:
Finally, whatever is the entity, capital requirements cannot circumvent the need for regulatory oversight & supervision and monitoring of transactions, inspections, audits, etcAll types of banks and non-banks, as well as the RBI have to upgrade supervisory systems and processesFor the first two categories RBI can help itself out by allowing for a Self Regulating mechanism under the aegis of the respective Industry Associations/Bodies entrusted with regulating its own.
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At a seminar last year, we heard from the RBI that the KYC (Know Your Customer) process had become more of a KYD process (Know Your Documents), where the customer was less important than the documents, making the target of inclusion more difficult.
The sheer variety of documents required by various agencies (see Table at the end of the post, compiled last August by my colleague S V Divvaakar) shows why India desparately needs a new approach to the norm.
RBI Governor DrRaghuram Rajan had this to say recently,
One roadblock to access, even to something as simple as a universal basic savings account, is Know Your Customer (KYC) requirementsExperts have emphasized the need to make it far simpler to open basic accounts, and have suggested minimizing the required documentationIn an effort to do so, the DrNachiket Mor Committee recommends requiring proof of only a permanent addressThis is nevertheless more onerous than current RBI norms, which allow an applicant to self-certify her address and other details for accounts below Rs50,000But despite the RBI’s exhortations, few banks have reduced their demand for documentation – they fear that they will be held responsible if something goes wrong, no matter what the regulatory normsThe acceptance of third party KYC certification is particularly difficult.
Today, stringent KYC norms keep too many out of the banking system, and lead to unnecessary harassment for othersBanks may adopt these norms more because of regulatory or legal liability than to safeguard against true criminal or terrorist activityCan’t we do better? Some bankers suggest that by monitoring activity patterns in accounts carefully, even while putting some limits on basic accounts (such as holding a large value cheque for a few days before it is cashed), much of the suspicious activity can be detected and stoppedCould we allow a commercial bank some regulatory dispensation in case there is minor mischief in some low value accounts, provided the bank has a reliable system in place to detect greater mischief? Could the gains in easing widespread access to safe accounts outweigh the costs of minor fraud? How can we get entities within the system to rely on each other’s KYC, without the process having to be continuously repeated? How can technology assist in effectively addressing the above issues? These are questions we have to examine and address.
Meanwhile DrK C Chakrabarty went on to add some deeper understanding on the very concept of KYC:
This is to my mind one of the most misunderstood concepts in banking parlanceKYC to a certain extent can be considered as a necessary evilBut, KYC goes much more beyond a simple proof of identify and proof of address for the banksKYC is a critical component of a bank’s risk management frameworkA customer-centric business needs to know its customer, the nature of his business and the inflows/ outflows into the accounts, if it is to provide customised business products and solutionsThis, I call as KYC-BThe banks further need to understand the risks associated with customer’s business to manage risks arising from potential delinquency, fraud and consequent losses as also legal and reputational risks arising from exposure to customers having links to Multi level Marketing (MLM) business/terrorist activities/ hawala transactions, etc, which is another manifestation of KYC and may be termed as KYC BRThe Know Your Customer (KYC), Know Your Customers’ Business (KYC-B) and Know Your Customers’ Business Risks (KYC-BR) should be ingrained in the DNA of the bank’s businessIt should be understood that it is not just procedural compliance, but that good KYC and KYC-BR compliance are important for the bank’s business.
One way to resolve this issue is to by moving to a singular KYC protocol that can be authenticated online anytime anywhereIndia already has such a system in place and Aadhaar is presently the only e-KYC document compliant with the requirements of digital documents under the IT ActIt resides in a centralized depository under unitary control of the UIDAIIn comparison, KYC data of all other institutions reside in different locations, exist independent of one another, and do not lend themselves for immediate, online verification or for external exchangeFurther, the eKYC service, already recognised by the RBI and being used by banks over the past few months, consists of a digital verification of the Aadhaar number and identity, with the digital signed response being accepted as an official online verification of the detailsThis makes it an online verification and authentication service that can be used to monitor transactions in real time, and if banks can set up the processes in line with the technology, the questions on risk, fraud and efficiency raised by the Governor in his speech will be answered.
Given that the capabilities exist currently, it is a shame that the legal and political battles have not been sorted out yetAs Jamal Mecklai has said, these issues will be sorted out, a mere hiccough and in another four-five years, we are set to see Aadhaar as much a part of our lives as mobile phonesTill we wait for that paradigm shift to happen, the paperwork tangles over KYC will continue to plague the inclusion objective.
|TABLE: List of KYC documents required by various types of agencies, for identity and address proof purposes|
|Identity||Passport, PAN card, Voter ID, Driving license, Identity card (subject to bank satisfaction; letter from recognized public authority or public servant, to the satisfaction of bank|
|Address||Telephone bill, bank account statement, electricity bill, ration card, letter from any recognized public authority, letter from employer (subject to satisfaction of the bank|
|Identity||Passport, PAN card, Voter ID, Govt./Defence ID card, Driving license, Identity card of reputed employers, Pension Payment orders issued to retired employees by Govtdepts, PSUS; Photo IDs issued by Post office, Photo ID of students issued by UGC/ AICTE approved university/ institute; letter issued by UIDAI with name, address and Aadhaar number; Job card issued by NREGA, signed by officer of state government; Ex-Serviceman card with photo issued by Defence Ministry; Bar Council/ Medical Association/ ICAI/ICWAI/ICSI card with photo, attested or embedded to members applicable to area where card is issued; valid Student ID card issued by Principal of recognized/ affiliated colleges; Defence dependent’s card issued by Defence Ministry; married woman ID proof with maiden name, with verified true copy of marriage certificate issued by competent authority, Valid /enforceable Arms License issued by competent authority or state/ Govtof India; Freedom Fighter’s pass issued by Ministry of Home Affairs, ESIC card with latest month pay slip; Talat/ Patwari attestation with rubber stamp and signatures; Gram sarpanch/ mukhiya attestation by rubber stamp and signature|
|Address||Credit card statement, Salary slip of reputed employers, Income/Wealth Tax assessment order; electricity bill; landline phone bill; bank statement; letter from reputed employer; letter from recognized public authority with verifiable record of issue of certificates; Ration Card, Voter ID; registered leave and license/ sale deed lease agreement; Passport, PAN card, Voter ID, Govt./Defence ID card, Driving license, Identity card of reputed employers, Pension Payment orders issued to retired employees by Govtdepts., post office savings book; Certificate of VEO, Court divorce order for opening account of divorcee; Gas connection pass book; PSUS; Photo IDs issued by Post office, Photo ID of students issued by UGC/ AICTE approved university/ institute|
|No Frills Account||Kisan Bahi/ Kisan passbook issued by Revenue authority, Job card issued by NREGA, signed by officer of state government; letter issued by UIDAI with name, address and Aadhaar number; any other document to bank’s satisfaction|
Foreign bank HSBC
|Identity||PAN Card; Passport; Election Voter ID; GovtEmployee ID card; Defence ID card; Photo Ration Card|
|Address||Passport, Voter ID, Driving License, Society outgoing bill, electricity/water/phone bill; property tax bill, domicile certificate with address issued by municipal corporation|
Association of Telecom Service Providers
|Identity||Passport, PAN card, Arms License, Voter ID, Govt./Defence ID card, Driving license, Ration card with photo; CGHS/ECHS health card; Certificate of Address issued by MP/MLA/ Gazetted Officer/ Govtrecognized educational institutions/ village Panchayat; Photo credit card; Address card with photo issued by Dept of Posts; ; Smart Card issued by CSD, Defence, Paramilitary forces; Current Post office Passbook or Scheduled Commercial bank; Photo ID of State/Central Govt./PSU employee; Caste and Domicile certificate issued by state Govt.; Pensioner Card/ freedom fighter card/ Kisan passbook.|
|Address||Passport, PAN card, Arms License, Voter ID, Govt./Defence ID card, Driving license, Ration card with photo; CGHS/ECHS health card; Certificate of Address issued by MP/MLA/ Gazetted Officer/ Govtrecognized educational institutions/ village Panchayat; Water bill/ fixed line phone bill/electricity/ credit card statement ( less than 3 months old) ITO assessment order; vehicle registration certificate, registered sale/lease agreement, Address card with photo issued by Dept of Posts; Photo ID of State/Central Govt./PSU employee; Caste and Domicile certificate issued by state Govt.; Pensioner Card/ freedom fighter card/ Kisan passbook.|
|Identity||Aadhaar No, Passport; PAN Card; Voter ID; ID card issued by state/centre; Driving License|
|Address||Aadhaar; Driving License, Lease Agreement, Voter ID, Telephone/water/electricity bill; Passport; Ration Card, Flat Possession/allotment letter; house registration document; LIC Policy; Bank/ Credit card statement|
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