Financial Inclusion- News and Views - February 2014
This month’s lead stories centre around the Report of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households that was released by the RBI in January: a) the Report’s recommendations include providing a universal bank account to all Indians above the age of eighteen years and a Vertically Differentiated Banking System with Payments Banks for deposits and payments with relaxed entry point norms and Wholesale Banks for credit outreach, and b) a blog post by Daniel Radcliffe and Rodger Voorhies that lauds the Committee recommendations for their potential to catalyze a big increase in financial inclusion in India, and flags two possible risks that could undermine the Committee’s objectives.
The Committee, headed by Dr. Nachiket Mor, set out six vision statements to achieve by 1st January 2016: a) Universal Electronic Bank Account (UEBA), b) Ubiquitous access to payment services and deposit products at reasonable charges, c) Sufficient access to affordable formal credit, d) Universal access to a range of deposit and investment products at reasonable charges, e) Universal access to a range of insurance and risk management products at reasonable charges, and f) Right to Suitability (each low-income household and small businesses would have a legally protected right to be offered only “suitable” financial services). The four design principles that would inform financial inclusion and deepening strategies discussed in the Report are: Systemic Stability, Balance-sheet Transparency, Institutional Neutrality, and Responsibility towards the Customer. The framework to understand various types of banking system designs uses the functional building blocks of payments, deposits and credit and constructs two broad designs. These are the Horizontally Differentiated Banking System and the Vertically Differentiated Banking System. Across these, ten existing and potential banking designs were identified. These are: National Bank with Branches, National Bank with Agents, Regional Bank, National Consumer Bank, National Wholesale Bank, National Infrastructure Bank, Payments Network Operator, Payments Bank, Wholesale Consumer Bank, and Wholesale Investment Bank.
In this blog post, Daniel Radcliffe and Rodger Voorhies highlight several promising elements in the Report’s recommendations as well as two risks that warrant further attention, when it comes to regulating non-banks. To begin with, the Report correctly establishes the importance of electronic payments in India’s financial inclusion strategy, and wisely separates the risks created by payment and deposit activities from those posed by credit, by creating “Payments Banks,” which can offer payments and deposits but not provide credit. The report also acknowledges the critical role played by non-banks in extending electronic payment networks into poor communities, recommending that mobile operators, consumer goods companies, and other non-banks be allowed to apply for Payments Bank licenses. While these recommendations promise to catalyze a big increase in financial inclusion in India, the blog post flags two possible risks that could undermine the Committee’s objectives: First, there is a risk that the Payments Bank licenses will have compliance costs that impair the business case for serving poor customers; the concern stems from the recommendation that Payments Banks should “comply with all RBI guidelines relevant for scheduled commercial banks (SCBs).” Second, the recommendation that all pre-paid instrument (PPI) providers be required to convert to a Payments Bank or become a Business Correspondent could create an unnecessarily high entry barrier for providers wishing to test new business models in this nascent sector. The authors suggest that an alternative may be to allow PPIs to operate (with cash-out functionality) until they reach a certain threshold deposit balance or customers base, at which point they must convert to a Payments Bank. This would create a more gradual path for payments and deposit providers to pilot different business models without establishing a full-fledged Payments Bank at inception.
Section I: Policy – the latest from India’s policymakers
The Indicus Centre for Financial Inclusion was launched in 2011 to distil and disseminate information on accelerating the poor’s access to high-quality financial services. The Centre is supported by the Bill & Melinda Gates Foundation. http://www.indicus.net/icfi