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Panel pill for bank overhaul

Mumbai, Jan. 7: Pencil in a date: January 1, 2016 — that is just under two years from now.

That is the date by when every Indian above 18 years of age will have an “individual, full-service, safe, and secure electronic bank account”.

That isn’t all. The goal is to issue every resident a universal electronic bank account with a full-service bank automatically when they receive their Aadhar number. There will be no fee for opening such an account. Moreover, no resident Indian will have to walk for more than 15 minutes to get to an electronic payment access point.

These are some of the laudable goals spelt out in a comprehensive report prepared by a specially appointed committee of the Reserve Bank of India headed by Nachiket Mor on the provision of financial services to small businesses and low income households.

Each electronic payment access point “would allow residents to deposit and withdraw cash to and from their bank accounts and transfer balances from one bank account to another, in a secure environment, for both very small and very large amounts, and pay reasonable charges for all of these services,” the report said.

One major sticking point in the whole exercise of opening a bank account is the enormous amount of problems poor people face in furnishing documents as proofs of identity and address. The committee relaxed the rules a little. “The RBI should require a strong proof of identity (POI) for each and every customer and a documentary proof of one national address but waive the requirement of documentary proof for the current address, for the purpose of opening a full-service bank account,” the report said.

“Proof of identity can be obtained by the individual from local authorities at the place at which they were born but proof of local address is much harder to obtain and is, perhaps, now the most significant barrier to opening a bank account for many individuals in urban and rural environments,” the report added.

The report seeks to push the envelop a little further down the road to financial inclusion — a goal that the central bank appears to have embraced with new-found vigour under governor Raghuram Rajan. The Mor committee was one of the first that Rajan established after taking over as governor on September 4.

While laudable, the goals are also very daunting. The report says: “Close to 90 per cent of small businesses have no links with formal financial institutions and 60 per cent of the rural and urban population do not even have a functional bank account. And, while the bank credit to GDP ratio in the country as a whole is a modest 70 per cent, in a large state such as Bihar, it is even lower at a mere 16 per cent. This has left a large part of the economy dependent on the informal sector for meeting its credit needs.”

But even in the face of adversity, there are a few experiments underway that have presented a ray of hope to the banking industry that will help it attain these formidable goals.

First, the Unique Identification (UID) project has already covered 50 crore Indians and expects to complete the task of issuing a UID to the rest of the country by 2016. By linking UID numbers to Know Your Customer (KYC) norms, the RBI has already paved the way for universalising bank accounts, thus removing one of the most important barriers to financial access.

Second, through the Bharat Broadband Network, the government is laying out the national optical fibre network to all the gram panchayats in the country and expects to complete this task by 2014. Against only 3 crore fixed line subscribers, telecommunications companies now have over 87 crore mobile phone subscribers of whom over 35 crore are based in rural areas. And while the urban number has stabilised, the rural number continues to grow at an annualised rate of 10 per cent, the report notes.

“If these opportunities are used well, paradoxically, it is even possible that poor historic progress on financial inclusion may actually present India with an opportunity to leap-frog over the rest of the world and may prove to be an advantage just as the absence of copper-wire allowed India to move directly to mobile telephony,” says the report.

The report also suggested that the RBI should consider restoring permission to non deposit-taking non-banking finance companies (ND-NBFCs) to act as banking correspondents of full-service banks.

New class of bank licences

The Mor committee also suggested that the RBI could consider issuing two new classes of banking licences to achieve the goals of financial inclusion. The first was to offer a payments bank licence to existing and new pre-paid instrument issuers (PPIs). The role of these payments banks would be to provide payment services and deposit products to small businesses and low-income households. They will be restricted to holding a maximum balance of Rs. 50,000 per customer.

The minimum entry capital requirement for the payments banks ought to be set at Rs 50 crore compared with the Rs 500 crore required for full-service scheduled commercial banks.

They will be required to meet the cash reserve ratio (CRR) requirements applicable to all the scheduled commercial banks. They will be required to deposit the balance proceeds in approved statutory liquidity ratio (SLR) securities with a duration of no more than three months and will not be permitted to assume any kind of credit risks.

SLR is the proportion of deposits that a bank must invest in government securities. The SLR now stands at 23 per cent.

Existing scheduled commercial banks should also be permitted to create a payments bank as a subsidiary, the report added.

The report also suggested the creation of another class of wholesale banks. The primary role of these entities would be lending and not the provision of retail deposit services. They will only be permitted to accept deposits larger than Rs 5 crore.

Since these banks would not accept retail deposits, the committee said the minimum entry capital requirement for them should also be Rs 50 crore compared with the Rs 500 crore required for full-service banks.

If the institution has fewer than 20 branches, it will not be required to meet the 25 per cent branching requirement. Institutions with 20 or fewer branches could be referred to as Wholesale Investment Banks, while those with a larger branch network could be referred to as Wholesale Consumer Banks.

The report added that wholesale consumer banks should be permitted to act as banking correspondents for other full service banks.

The suggestion to create two new classes of banks comes at a time the RBI is vetting proposals to hand out fresh banking licences with industry houses being permitted to enter the fray for the first time since the banks were nationalised in 1969.

Governor Rajan has spoken in the past of creating a new class of banks to deal with needs of different sections of the people in the country. He has also said licensing of new banks ought to be a continuous process

 
 
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