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By Nikhil Pahwa (http://www.medianama.com/author/nikhil/) (
@nixxin (https://twitter.com/nixxin) ,+NikhilPahwa
(https://plus.google.com/+NikhilPahwa) ) on September 21, 2015
Home (Http://Www.Medianama.Com) Aadhaar
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Internet(Http://Www.Medianama.Com/Tag/Internet/), Mobile
(Http://Www.Medianama.Com/Tag/Mobile/), Raghuram
Rajan(Http://Www.Medianama.Com/Tag/Raghuram-Rajan/), Reserve Bank
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RBI Governor Raghuram Rajan on Aadhaar,Payments Banks,
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The RBI Governor Raghuram Rajan batted for Aadhaar in his speech
at the CK Prahlad Memorial Lecture lastFriday, saying that in 2009
(he wasnt the RBI Governor then) and Prahlad, along with Abhijit
Banerjee, hadwritten to the then Prime Minister Manmohan Singh,
advocating, among other steps, accelerated efforts tobring out a
unique ID in India. Perhaps, therefore, we all had a small role in
the Prime Minister setting up theUnique ID Authority, headed by
Nandan Nilekani.
Rajan believes that the UIDAI is taking India towards a
universal unique identity, and believes that it wouldbe sad if its
use were severely restricted. Other countries like the United
States have used unique IDs, suchas social security numbers,
without serious allegations of violations of privacy.
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In doing so, Rajan chose to ignore the criticism of the Aadhar
project by a Parliamentary StandingCommittee, under the
Chairmanship of the BJPs Yashwant
Sinha(http://www.medianama.com/2011/12/223-the-lowdown-indias-unique-id-project-unraveled-by-standing-
-
committee/), and the fact that the United Kingdom had shelved
its Unique Identity project followingprivacy concerns
(https://en.wikipedia.org/wiki/Identity_Cards_Act_2006).
Rajan said that India needs to see how it can satisfy the
concerns of the Supreme Court without underminingthe value of the
unique ID, given the economic benefit, particularly, for the bottom
of the pyramid. Forinstance, he said, not only can UIDs expand the
access of the poor and young to credit as they borrowagainst the
collateral of their future good name, it will also allow the
regulator to detect and curb over-lending to individuals by asking
lenders to report the IDs of borrowers to credit bureaus.
Today,unscrupulous lenders can avoid current regulations against
over-lending by simply misreporting theborrowers name or address.
Similarly, the Government has used UIDs to weed out duplicate
beneficiariesfor various welfare schemes, allowing better targeting
of scarce funds to the very poor. I think C.K. (Prahlad)would want
us to find a way to move forward with UIDs.
On Regulators and the payments ecosystem
Need more competition in payments and banking: In order to get
sustained growth, we need morecompetition, especially from new
entrants who are in a better position to reach hitherto excluded
parts ofour economy. After a decade of no new entry, we will see
two new private banks this year, and a largenumber of payment banks
and small finance banks next year. Licensing is likely to go on
tap. Incumbent (banks) have been complaining about unfair
competition:Incumbents have expressed fearsabout unfair
competition. Competition is only unfair if it is not on the same
playing field. In fact, newentrants have no privileges that
incumbents do not already enjoy. We hope, though, that the new
entrantswill find innovative ways of giving customers better
services at lower prices, thus shaking up and changingthe banking
sector for the better. Regulators will be conservative: It is good
we are that way else there would be no speed breakers in theeconomy
to slow its propensity to get into trouble. But we also should not
stand in the way of innovation.There is a Chinese saying: Cross the
river by feeling the stones. We have tried to follow that path
ofexperimentation and incremental liberalization. for example, as
increasingly innovative new services wanttheir customers to have
the ability to make payments quickly, we have allowed small value
card paymentswithout two-factor authentication.
Note that a far too conservative approach can have a disastrous
impact on businesses in the Internet age. Itis because the RBI has
been far too conservative in opening up to mobile payments that a
number of mobilepayment companies funded in 2008 did not take off.
Where is MChek today? It was hypocritical of the RBI tobe ultra
conservative, and simultaneously complain about the lack of growth
in Mobile banking, as it did in2009
(http://www.medianama.com/2009/12/223-not-enthused-by-lack-of-activity-in-mobile-banking-prepaid-deputy-governor-rbi/).
On Over-invoicing by promoters
-
In is speech Rajan mentioned the issue of over-invoicing and
siphoning money out of businesses considered to be an issue with
some e-commerce companies in India but only in the context of
debtrestructuring. He said One gentleman accosted me the other day
and asked why, when he was paying hisdebt regularly, his competitor
who had siphoned money out of the firm through over-invoicing was
gettinghis debt written down because it was unpayable. The reality
is that firms have got into trouble for a variety ofreasons, only
one of which is over-invoicing. Wherever possible, of course,
promoters should share fully inthe costs of restructuring. But the
restructuring process is not meant to deal with criminality.
Siphoningmoney out of a business is a crime against lenders and
investors, and should be dealt with as such by theinvestigative
authorities. However, the original sin of over-invoicing should not
be a reason to keep idle aspanking new plant and to let its workers
go.
Jan Dhan Yojana: need to improve functioning of credit
information bureaus
The Prime Ministers Jan Dhan Yojana
(http://www.medianama.com/2014/08/223-pradhan-mantri-jan-dhan-yojana/)
has created accounts for much of the excluded population.
Government has taken the nextstep of attaching a variety of
financial services such as accident and life insurance to these
accounts, andsending Direct Benefits such as scholarships,
pensions, and subsidies to these accounts. We also have toease
access to bank accounts through Business Correspondents, payment
banks, and point-of-salesmachines so that they are used frequently.
Easy payments, access to cash-in and cash-out facilities,
andwidespread availability of safe savings instruments have to be
our next objectives in the financial inclusion ofhouseholds.We also
need to ease lending to small producers, whether they are farmers,
Self Help Groups, or businesses.For this, we need to improve the
structure and working of credit information bureaus, collateral
registries,and debt recovery tribunals ironically, credit flows
easily only when the lender is persuaded that he will gethis money
back, so easier access to credit necessitates harsher consequences
of default.
Clean-up in allocation of resources (including spectrum)
Newcomers and outsiders rely, not on relationships to get things
done, but on arms length auctions andcontracts, enforced quickly by
an impartial bureaucracy and judiciary. The clean-up that is taking
place inmethods of allocating resources like mines and spectrum,
and the attempts to improve the speed ofbureaucratic and judicial
decision making are all much needed to increase participation,
though much morehas to be done over time. Any reforms have to be
institutionalized, so that they outlive the reformerspassing.
Streamlining RBI Regulations by year end
More generally, we would like to improve regulation by focusing
on what is absolutely necessary to create asound business
environment focusing on enabling regulation rather than
paternalistic regulation whileincreasing enforcement of what is on
the books. We will trust but we will also verify. To this end we
are
-
streamlining all our regulations by the end of the year into new
Master Documents which will be placed onthe Internet and updated on
a real time basis, so that any regulated entity can know quickly
the gamut ofwhat is required when undertaking an action.
Digital Mapping and Land Records will help usage of land as
collateral
Perhaps the most important source of collateral value is land.
We need better digital mapping and cleanrecords of land ownership
across the country so that land can be used more effectively as
collateral.
Charter of consumer rights
RBI has developed a Charter of Consumer Rights following public
consultation. Bank boards have beenasked to put in place frameworks
that ensure those rights are protected. After those frameworks have
beenin operation for some time, RBI will take a view on best
practices, and regulation, if any is needed. In themeantime, field
visits by RBI, to check mis-selling as well as the proper
functioning of bank infrastructuresuch as branches and ATMs, will
be expanded.
Bankruptcy Code is needed
Failure is inevitable in a free enterprise system. An effective
resolution system is needed to preserveresidual enterprise value
after financial failure. Two critical elements are the speed of
resolution and thepredictability of how losses are shared amongst
contracts. For instance, few outsiders will want to lend ifthey
believe they will be subordinated to promoter interests in bad
times. So we need a speedy bankruptcycode to resolve distress while
maintaining the priority structure of claims, and I am glad the
Finance Ministryintends to bring one in soon. The bankruptcy code
will give creditors more ability to resolve distress, andhelp
strengthen the corporate bond market, which is so essential to
infrastructure financing.
On countries deciding core-competencies of nations
These are some of the ways I think we can position the financial
system towards sustainable growth. BeforeI end, let me try to
answer one last question. In the same way as firms have core
competencies, do countrieshave core competencies?
Perhaps they do. But it is very hard for public authorities to
determine what they are in the face of massivelobbying and
disinformation from interested parties. If we say we want to focus
on national corecompetencies, every industry will be out to show
why it thoroughly fits the bill in the same way as everyindustry
today wants to tell us why they especially deserve special tax
benefits or interest subventions.Remember, the License Permit Raj
persisted precisely because some industries were favoured over
others inthe so-called national interest. So even if nations have
core competencies, it will be very hard to determinewhat they are,
and very easy to succumb to vested interests in supporting the
wrong ones. Better to focus oncreating an enabling environment, and
let the core competencies emerge from the fillip given by
theenvironment much as the IT sector emerged as a result of the
investment the country made in technicaleducation, but without
specific encouragement by the government.
-
On Jugaad
Jugaad or working around difficulties by hook or by crook is a
thoroughly Indian way of coping but it ispredicated on a difficult
or impossible business environment. And it encourages an attitude
of short cuts andevasions, none of which help final product quality
or sustainable economic growth. While we should respectthe
entrepreneurial abilities of our business people in difficult
environments, it is better for us to change theenvironment for the
better. That is indeed what we are trying to do.
Lesson from Brazil: need growth to be sustainable
Rajan said that Industrial economies are struggling, and India
appears to be an island of relative calm in anocean of turmoil,
with other BRICS having deep problems. He suggested that Brazil has
a lesson to offer:
Only a few years ago, the world was applauding the countrys
thriving democracy, its robust economicgrowth, and the enormous
strides it was making in reducing inequality. It grew at 7.6
percent in 2010, andhad discovered huge oil reserves which the then
President Lula likened to winning a lottery ticket. Yet thecountry
is expected to shrink by 3 percent this year, and its debt just got
downgraded to junk. What wentwrong? Paradoxical as it may seem,
Brazil tried to grow too fast. The 7.6 percent growth came on the
back ofsubstantial stimulus after the global financial crisis. In
an attempt to keep growth high, the New York Timessays the central
bank was pressed to reduce interest rates, fuelling a credit spree
that overburdenedcustomers are now struggling to repay. Further,
Brazils government funded development bank hugelyincreased
subsidized loans to corporations. Certain industries were favored
with tax breaks while pricecontrols were imposed on gasoline and
electricity, causing huge losses in public sector firms. Petrobras,
thenational oil company, which was supposed to make enormous
investments in oil drilling, instead becameembroiled in a
corruption scandal. Even as government pensions burned an ever
larger hole, budget deficitsexpanded, and the political consensus
to narrow them has become elusive.
The lesson to be learned from Brazil, Rajan said, is that Growth
has to be obtained in the right way. It ispossible to grow too fast
with substantial stimulus, as we did in 2010 and 2011, only to pay
the price inhigher inflation, higher deficits, and lower growth in
2013 and 2014. Of course, India is not in the samesituation today.
But with the world being an inhospitable place, we have to work
hard to strengthen ourcurrent recovery and put it on a more
sustainable footingFor the RBI, the key tasks are to keep
inflationlow not just today but well into the future so that we get
moderate nominal interest rates that satisfy not justthe vocal
borrowers but also the silent savers. We also need to clean up the
banking system of distressedassets so that it is in a position to
fund growth again.
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RBI releases draft guidelines for allowing Telcos, Wallet cos to
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to launch mobile wallet SBI Buddy
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Bank launches applications for wearables on Android, Tizen and
Apple
(http://www.medianama.com/2015/04/223-icici-bank-launches-applications-for-wearables-on-android-tizen-and-apple/)Banks
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