Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

A shaky vision for financial inclusion

The Nachiket Mor committee report does not address the issues that militate against financial inclusion

The Nachiket Mor committee report has recommended a new banking structure in India. This, however, will not necessarily be one that will serve the aim of inclusion best.

The committee must be applauded for meeting the deadline given with such a comprehensive report that is liberally sprinkled with suggestions for avoiding micro-management. For example, the distance between bank branch and the banking correspondent should be set by the bank according to its own operational convenience and not by rules set by the Reserve Bank of India (RBI).

Yet the inherent contradictions in the existing system remain. To give one example, the report shows the discord in the flow of priority sector credit: agricultural credit is bunched up in March to meet the targets set by RBI, but the rush does not match the needs of the farmer. Hence, the report recommends tracking the outstanding amounts on a daily basis rather than at the end of the fiscal.

Just this single point underscores the fact that micro-management by well-intentioned policymakers can often clash with actual objectives. Yet, even as the report tries to address such contradictions, when it comes to the crux, not only do the fundamentals remain the same, i.e., the emphasis on bank-led model for financial inclusion, the existing liberalized space of prepaid payment instruments (PPIs) has been replaced by payment banks. In other words, it is clear that inclusion will remain the preserve of banks.

Given the lacklustre performance of banks globally in reaching out to the excluded, unless the core issues plaguing the bank model at the last mile are addressed, will creating another set of banks really help in achieving the goal of inclusion? Yes, by piggybacking on the Aadhaar roll out, everyone will get a bank account, but what happens after that is the key to real inclusion.

Interestingly, the report does highlight the need to capitalize on the strengths of non-banks when it comes to payments for inclusion. However, after setting out risks in the existing PPIs, the report flips the argument over and asks non-banks to become small specialized banks instead.

At first reading, this looks like a good idea, bringing in existing PPIs and other non-banks, and at the same time mitigating risks that are the bugbear of RBI. So where is the problem? The issue is that by not separating payments and deposits, the recommendations have, in all probability, tangled the business case for payments even more than it currently is. There is a reason why the European Union’s payment systems directive, 2007, and the recent Brazilian regulations created separate payments institutions, clarifying that any money kept with an entity for the sole purpose of payments is not to be treated as a deposit. Such institutions do not accept deposits and do not give credit.

In India, rather than making such a clear distinction, the recommendations force non-banks to become banks instead. The tangling of the business case comes through in the report itself, with the recommendation that at least one deposit product provided through payment access points should give a positive real rate of return over the Consumer Price Index. As the report shows at the moment no bank provides such a product. Putting such a restriction on any non-bank that wants to enter the payments business is to saddle the business case with even more problems than those that exist currently. Then, there is the other stinger that says that all guidelines for scheduled commercial banks will be applicable to payments banks, creating more confusion for anyone who wants to enter the payments business.

While existing small PPIs have been forced into examining their very existence now, big telcom firms and India Post seem the obvious contenders for the new payment banks licences. This model can get India Post a bank licence that it wants, but will telcos find a business model with deposits commercially viable?

Globally, non-banks are playing a greater role in the payments space because their core competence of wide network, revenue model and other features match the needs of the poor and the unbanked, i.e., low value, high volume transactions. A 2011 Bank for International Settlements (BIS) working paper by Peter Dittus and Michael Klein dissects the banking business into four parts: exchange of different forms of money for one another; storage of money for safe-keeping; transfer of money from one owner to another and investment of money.

This shows the first three requirements are the most basic needs of the unbanked and can be met without involving the fourth, which is the core banking business. This principle of separating payments from intermediation has been accepted and carried forward by international standard setting bodies—the Financial Action Task Force, the Global Partnership for Financial Inclusion (the platform of the Group of Twenty countries for financial inclusion) and the BIS’ committee on payment and settlement systems. The PPI model in India was in line with these principles. Unfortunately, by binding payments with deposits, the payment banks idea fails to meet the grade now.

Sumita Kale is with the Indicus Centre for Financial Inclusion.