MONTHLY ARCHIVES: SEPTEMBER, 2013
Standard Setting Bodies and Financial Inclusion
The five international standard setting bodies (SSBs) namely- Basel Committee on Banking Supervision (BCBS), Committee on Payment and Settlement System (CPSS), Financial Action Task Force (FATF), International Association of Deposit Insurers (IADI) and International Association of Insurance Supervisors (IAIS)- provide the basic framework for country level regulations and supervision of formal financial services and institutions that provide them (GFPI, 2012)In other words, SSBs are responsible for establishing the framework of regulations within which formal financial sector operatesTherefore, when financial inclusion objective was adopted by countries across the globe, the establishment of requisite framework of regulations became one of the mandates of SSBs besides being the responsibility of respective country’s polityThe regulations and supervision by SSBs have significant impact on the delivery and outreach of formal financial services and consequently play a vital role in the process of financial inclusion.
Standard Setting Body for India
This rationale for a standard setting body to promote financial inclusion was recognized by Reserve Bank of India and in the Vision document – Payment System in India: Vision 2012-15 it highlighted the need for establishing a standard setting body with representation from Indian Banks Association (IBA), Institute for Development & Research in Banking Technology (IDRBT) and other stakeholders (such as non bank authorized entities, relevant industry associations and experts) for formulating standards for various payment systemsRBI recognizes in the vision statement its commitment towards establishing an efficient, accessible, interoperable and inclusive payment and settlement system for the countryTherefore, emphasizes on the need for an appropriate regulatory framework enabled by a SSB which encourages innovation and competition in the payment system to make it more inclusive and consistent with international standards and best practices.
Issues for SSBs
Though SSBs have embraced the goal of promoting financial inclusion but this proves to be a challenging task as it involves shift from core focus areas and requires evolution in the way a SSB functionsWhile the Financial Action Task Force has explicitly stated that controls put in to protect against fraud and money-laundering should not unduly inhibit access to well regulated financial services for the financially excluded, the Basel Committee on Banking Supervision is looking at prudential standards for innovation in branchless banking, including agent networks and non-bank e-money and the Committee on Payment and Settlement Systems that dealt primarily with large-value payments and systemically important payments systems is involved in safe and efficient retail payment systems and instruments
As discussed in paper by CGAP for GPFI- Global Standard Setting Bodies and Financial Inclusion for Poor- towards proportionate standard and guidance, following are the issues faced by SSBs for promoting financial inclusion:
1) Risks associated with considering the financial excluded population section which has not been systematically studied but pose threat to financial integrity (eg- money laundering, and terrorist financing risks of cash transactions, often cross borders through informal providers).
2) Changes in the nature and level of risks resulting from increased financial inclusion, for instance- a) inclusion of characteristics of financially excluded customers into the regulatory framework and such customer profiles being very distinct from the existing customer base; b) inclusion of innovative products and services to bring the financially excluded within the purview of formal financial net, for eg- e-money, agents and similar innovations.
However, to be able to substantially contribute to the process of financial inclusion, standard setting bodies should follow the principle of proportionality (G-20’s Principles for Innovative Financial Inclusion), which requires balancing of rules and regulations in a regulatory framework with the risks and benefits involved in innovative products and servicesRisks and benefits are perceived differently by different stakeholders (of the process of financial inclusion) and the complexities of such risk and benefit assessments varies across countries with varying degrees of capacities of policymakers, regulatory bodies and level of financial exclusionTherefore, if guidelines for such assessments are inherent in the regulatory framework set by SSBs then not only SSBs would be able to promote financial inclusion more effectively but country level policy makers would be able to follow SSBs standards and guidance for financial inclusion in a meaningful manner (GPFI, 2012)For instance in 2010 BCBS came up with a report "Microfinance activities and the Core Principles on Effective Banking Supervision which provided a useful starting point for proportionate application of Basel Core Principles (BCPs) for promoting financial inclusion agendaPrior to this in June 2009, IADI’s Core Principles developed jointly with BCBS implied that deposit insurance is an integral part of formal financial net and has the potential to encourage greater participation by financially excluded poor in the formal financial sectorIn addition to this in 2010, IADI formed the Financial Inclusion and Innovation Subcommittee (FIIS) to study the issues relating to financial inclusion and deposit insurance via survey of IADI members to identify the practices followed by them on such issues.
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In his first statement on taking charge as RBI Governor, DrRaghuram Rajan, announced a new panel on financial inclusion, to be headed by DrNachiket MorThe panel has been set the goal of "greater financial access in all parts of the country, rather than meeting bureaucratic norms. This indicates that we are in for a radical change in our inclusion mission, moving away from just clocking up numbers of villages, business correspondent agents and basic accounts as progress in inclusionSurveys by CGAP-CAB and MicroSave have shown high dormancy rates in accounts and agents, as well as low profitability of agents, clearly the considerable strength in numbers has not translated to meaningful inclusion.
So which way is the RBI set to head now? One tip comes from the 2008 report of the Rajan Committee on Financial Sector Reforms, ‘A hundred small steps. This report made a crucial point — it is high time that the focus moved away from the "large-bank-led, public-sector-dominated, mandate-ridden, branch-expansion-focused strategy for inclusion towards "a national goal of ensuring in three years that 90 per cent of households, if they so desire, have access to a deposit account and to the payments system, and that government transfers under various schemes be implemented through this system .
Sure enough, Rajan has cued into access to finance through payments as crucial for inclusion, and announced specific actions in his first statement on strengthening the payments infrastructure: a national giro-based Indian Bill Payment system to allow payments anywhere any time, allowing non-banks to install Point-of-Sale terminals to improve acceptance infrastructure for cards, allowing cash-out for non-bank issued wallets/pre-paid cards and examining the feasibility of using encrypted SMS-based funds transfer using an application that is handset-agnostic.
With a time-bound framework set for these steps, it appears that our financial inclusion mission is to go through a shake-up now.
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