• GS2: Issues relating to poverty and hunger. • GS3: Inclusive growth and issues

arising from it.

• Committee on Comprehensive Financial Services for Small Businesses and Low Income Households• Nachiket Mor : board member RBI• Member 12 :NABAD, BoB, Axis

Bank, CRISIL, Std.Chartered.

Nachiket Mor Committee

What is financial inclusion?• BANKING Savings & payment-through

branches, ATM, cheques, e-transfer

• CREDIT Loans at affordable interest rates.

• INVESTMENT mutual funds, pension plans, child investment plans etc.

• INSURANCE Life insurance and non-life (general) insurance.

Why financial inclusion?• Savings into investment• Unforseen circumstances• Japan, S.Korea, USA• Vs Money lenders• E-Payment: Cashless subsidies, payments, salaries: Rs.1 lakh cr

(Mckinley study)• Lack of formal channels to save money=>Ponzi scheme, MLM,

Saradha Chit fund, Zaheer Rana, Abhay Gandhi, Ashok Jadeja.• Social harmony• Empowerment

Financial inclusion So far: Banking• Post office savings account, money transfer, provident fund, insurance• Nationalization of banks and insurance companies.• RRB, Cooperative Banks, PACS• No Frills accounts for poor people. Later renamed to Basic Savings Bank Deposit

Account (BSBDA).

• DBT=> open account• KYC norms relaxed, Documentary proof.• Aadhar can be used to open bank account

• 69: Lead bank scheme• 2005: No frills Acount• 2006: BC• Act as representatives of Banks• Account, deposit, payment, loan

processing,• PoS/ Handheld

computer/Biometric.

Who can become?•NGO, SHG, MFI, Post office, insurance agent•Panchayat•Cooperative society.

Bank: Business Correspondents Agents

Financial inclusion: Banking= Swabhiman• Initiative by the Finance Ministry + Indian Banks’ Association• launched in 2011• [pop.2000], 70000 habitats: March 2012• UIDAI/Aadhar card=>Bank account.• BC (bank Saathi)=> payment, subsidies, loan applications.• Financial literacy, loans to small marginal farmers.• Government gave Rs.500 mn to banks: training, commission,

paperwork

Banking services: White Label ATM• Don’t have bank logo• 80s: first ATM in India• 2012: Guideline; 2013: License• Tata => Indicash.• Muthoot Finance, Srei Infra., Prizm Payments, >15• open 2/3rd of these ATMs in semi urban and rural areas.• RBI has ordered the banks to open at least 25 per cent of their new branches in unbanked rural centres.

Financial inclusion: Credit services (loan)• PSL targets 40%• 90s: SHG Bank linkage program. NABARD provides funding• KCC, GCC for loans.• 2011: RBI introduced new category: NBFC-MFI • Interest subvention scheme• Debt waiver (2008)• Mahila bank in 2013• Loans without collateral upto 1cr for women

Investment

1. Post office, PPF, NPS (Swavalamban)

2. UTI: Public owned Mutual fund company

3. RGESS, 4. Inflation indexed bonds5. Financial literacy campaign by

SEBI and RBI

• Nationalization• Post office: has tied up with LIC,

e.g. Gram Surakha, Suvidha, Sumangal etc.• Weather based crop insurance

loans for farmers.• Aam Admi Bima Yojana• Rashtriya Swasthya Bima Yojana

(RSBY)• Rajiv Gandhi Shilpi Swasthya

yojana (Health insurance)

Financial inclusionInsurance

Mock Question (2012)The basic aim of lead bank scheme is thatA.Big banks should try to open offices in each districtB.There should be stiff competition among various nationalized banksC.Individual banks should adopt particular district for intensive developmentD.All banks should make intensive efforts to mobilize deposits.

1. Skip 2. Attempt 3. Mark n Review

Financial inclusion: short comings• Census 2011 Banking services1.67% urban households2.54% rural households3.Regional variation: Nagaland 0%; S.W.India 70% adults4.Small Marginal Farmers did not benefit much.

• + Ponzi scam, MLM.

Nachiket Committee: 6 Point VisionTopic Vision StatementBank account A Universal Electronic

Bank Account by 1/1/2016

Access to bank 15 minutes walking distance (400)Payment Banks

Easy loans PSL 50%investment Wholesale Banks

1/1/16Broker model, Cross-KYC

insurance

consumer rights Financial Redress Agency (FRA)

UEBA

• Universal Electronic Bank Account• 1/1/2016; Adult resident• Aadhar => UEBA, choice of bank• SBI, BoB, Axis• Open..free, transactions….x

• 400 people• 15 minutes walking distance• Deposit, withdraw, transfer• Free…..x• Examples: bank branch, BCA,

mobile shops, Panchayat, Post Office, Kirana, retired school teacher.

Banking ServicesAccess point

Challenges?

• Penetration• Electronic infra.• staff• Naxal• Shikha Sharma: 2018

• 35/85 rural mobile; 10%• 2014: National Optical fiber

network (NOFN).• All 2.5 lakh gram Panchayats

=>broadband internet=>• e-banking• Setup Payment Banks.

BankingPotential

Payment Bank (Suggested)Commercial Banks Payment Banks

Target audience: all Small businessman, low income households.

-- Cannot hold more than Rs.50k / customer

Can give loans Cannot assume credit risk. (SLR)

Entry capital Rs.500 cr 50 cr.

CRR 4%, SLR 23% CRR yes, SLR eliminate

PSL 40% N/A.

Payment Banks: who can get license?1.mobile phone companies, consumer goods companies, post office system, 2.agriculture/dairy type cooperatives 3.Even Scheduled commercial banks via Subsidiary.

Criticism: cannot give loans, existing SCB sufficient. Counter: RRB; m-Pesa (Kenya)

Credit (Loans): PSL (existing setup)1. Agriculture and allied activities: (dairy, fishery, animal husbandry, poultry, bee-keeping

and sericulture.): direct vs Indirect2. Micro and Small industries (upto 2 crores)3. Education loans (10 lakh in India, 20 lakh for going abroad)4. Housing loans (upto max. 25 lakh in metropolitan cities)5. Renewable Energy: Loans for solar and renewable energy solutionsWeaker Section:

1. Small and marginal farmers;2. Artisans, village and cottage industries3. Women, SC/ST, minorities, SHG4. Distressed borrowers5. NRLM etc. beneficiaries

PSL Targets (existing)Target Desi Banks. (+foreign

banks with 20/>)Foreign banks <20 branches

Agro 18% No specific targetsWeaker sections

10% No specific targets

Remaining categories under PSL

Whatever left to reach the 40% target

No specific targets

Overall PSL target

40% of net loans given 32%

DESI + Foreign > 20

• RIDF; NABARD• State government• interest

• SEDF= small enterprises development fund; SIDBI

PSL: what is targets not met?Foreign < 20

PSL: additional safeguards• Arrange photo• SC/ST application: branch manager can’t disapprove• Disaster, loan restructure• Penal interest ….x (25k)• Regional level: complaint• Maintain database. RBI can inspect.

PSL: ProblemFinancial inclusion District Direct

agri. Weaker section

Other sectors

highest Pattanamthitta, Kerala

1.25 1.1 1

high Namakkal, TN 1.38 1.21 1.10medium Rajkot, Guj 1.43 1.25 1.14medium Muzzaffarnagar,

UP1.46 1.28 1.16

lowest Kurung Kumey, Arunanchal

1.56 1.37 1.24

Raise PSL to 50%Earlier PSL-system (40%) New (adjusted) PSL system (50%)

Whether SBI gives loan to farmer in Assam or in TN, its counted one and same.

hardship area will get more weightage.

40%=40 crores target 50%=50 crores target

To reach this target, SBI will have to give away exactly 40 crore rupees.

Not necessary to give exactly 50 crore rupees. Suppose SBI focuses only where they get multiplier of at least 1.3. 50 crore / 1.3 = approx. 38 crores.

Meaning, only 100-40=60 crore left for giving out as 'normal' loans (car loan, business loans etc. where SBI earns more profit margin)

, 100-38 crores=62 crores left. So additional two crores for giving out as "normal" loans=more profit than previous (40%) system.

Raise PSL to 50%• Replace 40% PSL requirement with 50% Adjusted PSL (APSL), • Provide multiplier benefit to bank’s APSL targets, for serving loans in

hardship areas.

Other• Debt relief….x• Interest subvention….x• Relief: DBT…yes• All defaulters: CIBIL.

1. Real interest rate positive.2. Only two categories of NBFC:

core vs non-core.3. Wholesale Banks,

Securitization, PSL.

#4: Investment

Corporate Agent Model

#5: InsuranceFeatures

• One bank ties up with• One life insurance• One non-life insurance

• E.g. HSBC: Tata AIG general insurance.• Problem: Customer deprived of

choice. Bank not liable.

Broker Model

#5: InsuranceFeatures

• Choice, protection, bank liable • FM announced permission in

2013 budget• RBI also gave permission• But banks reluctant. (training,

MoU)• IRDA – make compulsory.

#5: Insurance, Nachiket1. Broker model right.2. By 1/1/16 provide insurance services to all (life, general, cattle,

crop, property.)3. Cross KYC4. Allow NBFC to accept deposits (e.g. while selling insurance policies under broker model.)

Financial Products: Consumer protection: why?ULIP ~15 years. But 40% commission within first year.Insurance, child investment product

Real interest rate….xFace value of money ….yesReal value of money…no.

Saradha Group Chit fund, 15 lakh people lost moneyBanks Corporate agent model.

One bank- one insurance company. Choice ….X

Teaser loans Proper Credit record verification…..XRecovery agents Abuse.

Financial Products: Consumer protection: How?Solution ProblemInformation disclosure, brochure technical jargon.

Terms and conditions….Rs.3000 cr.Financial literacy SEBI and RBI already trying.

But information asymmetry between buyer and seller.

TCF: Treat your customer fairly (RBI guideline’13)Provision•Just because client signed the form, doesn’t absolve thae bank.•Bank must provide they acted in best interest.

Problem:-Penalty no.-Australia…No doc, teaser loans. Consumer court.

Right to suitability

• put the onus on the seller to ensure that Customer is indeed suitable for the given product (insurance policy, mutual fund, ULIP etc.) • don't sell everything to

everybody. • customer must have a Right to

Suitability. • Otherwise penalty.

• To Banks, NBFC• Salary bonus motivates to

misguide• Internal mechanism for

Consumer complaint • Paper record of everything.• @RBI- surprise audit, cancel

licenses.

Nachiket: SolutionAgent guidelines

Consumer rights protection @present:

stage Banking(RBI) Finance(SEBI) Insurance(IRDA) NPS(PFRDA)

1 In house SCORES (SEBI complaints redress system) webportal

Inhouse NSDL

2 Banking ombudsman

SEBI tribunal IDRA Grievances cell | Insurance ombudsman

PFRDA

3 Consumer court

Securities Appellate Tribunal (SAT)

Consumer court Consumer court

4 Court of law Supreme court Court of law Court of law

+ NABARD, SIDBI, NHB are also involved in regulation, as subsidiaries of the RBI. + As many as six Ministries of the Government of India and State Governments also involved.+ consumer courts also involved.

Regulatory bodies: problems?• Overlapping jurisdiction, delays. Lack of coordination.• NBFCs (non-banking financial companies e.g. Mutooth finance.)

Because • They don't fall under Banking ombudsman.• They mostly serve rural areas. • Villagers are not even aware of the consumer rights. +• they don't have the time or money to visit city, complaint to RBI's regional

office or contact any lawyers.

Financial Redress Agency (FRA)• independent of all regulators. (RBI, SEBI, IRDA etc.)• unified grievance redress system for the entire financial system • FRA will be managed by a board of directors. • When FRA body has acquired sufficient expertise, give powers of

consumer court.• Similarly, At state level, there are multiple regulatory bodies for NGO-

MFI, chit fund etc.• Nachiket recommends all such bodies be merged into a single State

Finance Regulatory Commission (SFRC).

Nachiket Committee: 6 Point VisionTopic Vision Statement

Bank account A Universal Electronic Bank Account by 1/1/2016

Access to bank 15 minutes walking distance (400)Payment Banks

Easy loans PSL 50% (multiplier)

investment Wholesale BanksInsurance for all: 1/1/16Broker model, Cross-KYCinsurance

consumer rights Financial Redress Agency (FRA), right to suitability

Mains Question• GS2: Issues relating to poverty and hunger. • GS3: Inclusive growth and issues arising from it.

Question• Explain the importance of Financial inclusion in achieving Inclusive

growth for all, and Enumerate the recommendations of Nachiket Committee recommendations in this regard. (10m| 200 words)

Fin. inclusion =>inclusive growth• Define inclusive growth. Give depressing

numbers. India vs Bharat.• Financial inclusion- explain. • Connection between Financial inclusion vs

Inclusive growth1. Easy loans=>small businessman, low income

groups=> growth, social harmony, naxal.2. DBT, subsidy leakage prevented. (Bank

account)3. Investment, insurance product=>unforeseen

circumstances.=>Poverty combat.4. Ponzi schemes, women empowerment.

What to write?Nachiket’s recommendation?

• Official name of the Committee• Salient recommendations are:

must

• SLR removal• Difference between SCB vs

wholesale/payment banks.• Insurance Broker model, allow

NBFCs to accept deposits.

Nachiket’s recommendationsNot necessary

• UEBA: 1/1/16 (mechanism)• 15 minutes walking distance (400

people); access points examples• Payment banks- (not all details)• PSL: 40 to 50; with target multiplier

benefit given to banks if they serve loans in hardship areas.

• Wholesale bank to help retail banks achieve their PSL targets.

• + ve real interest rate.• Insurance services to all by 1/1/16. • Financial Redress Authority.• Conclusion

Interview• 100% financial inclusion vs 100% literacy. Which one will you pick

first, as the prime minister of India? and why?• Do you think higher literacy levels and financial inclusion are directly

related with each other? Yes/No and Why?• If yes then why North Eastern States have performed relatively low on

the parameters of financial inclusion, despite having relatively higher education levels? • As a policy maker, what will you do, to fix this anomaly?