Mumbai: A top Indian bank lobby criticized the recent recommendations on financial inclusion made by a Reserve Bank of India (RBI) panel, arguing that some of its key proposals were impractical.

The Indian Banks’ Association (IBA), in particular, raised concerns over the RBI panel’s recommendation to create dedicated banks for rural inclusion known as payments banks; its suggestion for a 50% adjusted target for so-called priority sector lending as against the current 40% fixed target; and its proposal to hold banks legally responsible if they did not offer suitable financial services to low-income households and small businesses, among others.

Under priority sector lending norms, banks need to lend 40% of their total advances to agriculture, exports, micro-credit and economically weaker sections. Failure to do this requires them to put money into the rural infrastructure development fund maintained by the National Bank for Agriculture and Rural Development.

“Banks are finding it difficult to achieve even the existing target of 40%. An adjusted 50% target would mean a steep increase in the priority sector burden even if one factors in the weightages," a senior banker involved in the process said, requesting anonymity as he is not authorized to talk to the press.

As per the recommendations of the RBI panel headed by its central board member Nachiket Mor, set up to lay down a road map for financial inclusion in Asia’s third-largest economy, districts and sectors will be assigned different weights based on the difficulty in lending to them, and bank lending to a difficult sector in a difficult-to-reach district will benefit from a higher weight.

IBA argued it is not always possible to reach difficult segments and geographies and lend directly, and that it would be difficult for banks to increase priority sector lending to beyond 43-44%. The new target will also mean a steep increase in the actual amount of funds banks need to lend to the priority sector.

“Last year, banks failed to meet the priority sector lending target. They are finding it difficult to achieve," said Saikiran Pulavarthi, analyst at Espirito Santo Securities India Pvt. Ltd. “One reason is there are not enough opportunities. When agriculture as percentage of GDP (gross domestic product) is falling drastically, how does one expects banks to go ahead and continue lending to the sector."

The bank lobby, which has communicated the lenders’ feedback to RBI, also said the panel’s 1 January 2016 deadline to make full-service electronic bank accounts available to all adult citizens is not feasible, and it would require at least till 2018 to achieve.

RBI governor Raghuram Rajan set up the panel under Mor to recommend ways to spread banking services to the unbanked areas of the country. This is one among a slew of major initiatives taken by Rajan, a former chief economist at the International Monetary Fund, after he took over on 4 September as RBI governor.

As per the Mor panel’s estimate, 60% of the rural and urban population in India do not have functional bank accounts. The report and the comments received are under the consideration of the apex bank.

Payments banks

On the Mor panel’s recommendation for payments banks, IBA said these may not be sustainable as they cannot lend and are only allowed to invest in government bonds.

The panel mooted payments banks with an initial capital of 50 crore to provide payments services and deposit products to customers, with deposits capped at 50,000 per customer.

These banks, however, would not offer loans to individual customers, the report said. Additionally, these banks will need to meet the mandatory cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements.

Banks are required to keep 4% of their deposits with RBI on a fortnightly basis, on which they earn no interest. The payments banks will also have to adhere to the SLR rules, and invest 23% of their deposits in government securities of a duration no longer than three months.

Some top bankers, however, recently spoke in support of payments banks.

Arundhati Bhattacharya, chairperson of State Bank of India, the country’s largest lender, had in a discussion organized by Mint on 30 January said that payments banks would take the creamy layer of the business and leave the difficult part of lending, making for low-risk and profitable banks.

Other experts are sceptical of its format.

“The issue around the viability of a payments bank needs to be examined further as their ability to raise deposits at rates competitive to banks will be difficult as full-fledged banks would also compete for the same money," said Abizer Diwanji, partner and national leader-financial services, EY India.

The ability of payments banks to earn higher returns is restricted as they can only lend wholesale to banks which, in turn, would make it difficult for them to raise capital as the return on investment would be low, Diwanji added. “Also, the impact of CRR or SLR may further drag down returns," he said.

IBA also challenged the proposal to hold banks responsible for offering “suitable" financial products. As per the Mor panel’s report, each low-income household and small business would have a legally protected right to be offered only “suitable" financial services. The customer will have the right to seek legal recourse against the bank if she feels that the due process to establish suitability was not allowed.

“The suitability aspect is difficult to establish," the unnamed senior banker quoted earlier said. “This will require a lot of private data and background of the customer. Even if the customer consents to a product, he or she can later challenge that saying the product is not suitable."