Aadhaar bank of India
So far banks have not been able to leverage UIDAI. Indeed, if anything, they have found ways of scuttling it
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The Nachiket Mor committee on Comprehensive Financial Services for Small Business and Low Income Households lays down a new approach to banking. The report could well be the starting point for a new financial architecture in line with India’s emerging, new economy.
This is the first time that an attempt has been made to redesign the banking sector and align it with changes in the country’s macroeconomic structure, its policy environment and, in particular, technology.
Twenty five years ago, the economic policy regime was changed rather dramatically. Since then, the structure of the economy has undergone a significant change. Yet the institutional framework of banking has remained unchanged.
While banking regulations changed significantly as the policy regime moved from a controlled to a regulated environment, a robust and comprehensive institutional reform did not take place in the banking sector.
The design of banking sector reforms, independent of the financial sector reform, has to be such that it meets the requirements of growth that have emerged from failures as well as the exclusionary tendencies of market-led growth.
At the same time, technology has been a game changer, even in banking. Yet it has not been leveraged to redress issues of market failure and financial inclusion.
The significant conceptual advance the report has made is one of organically and explicitly linking financial inclusion of households with that of small enterprises.
Four years ago this column suggested: “If personal financial inclusion has to graduate from being a personal finance product to a self-sustaining process, it will have to be accompanied by financial inclusion for small- and medium-enterprises.”
The Mor committee by listing out 10 banking designs has conceptualized the basic building blocks required to create a new financial architecture.
In doing so it has moved the focus away from products to processes and from initiatives to institutions. What the panel has succeeded in doing is to combine banking innovation with institutional innovation in the sector.
It will be expected that in giving new bank licences, the Bimal Jalan led screening panel take cognizance of the recommendations of this report. This is because the prime driver for new bank licences is supposed to be financial inclusion.
It should be obvious to anyone with a nodding acquaintance of banking that no matter how many new permits are given, and who gets them, it is not going to have any serious impact on the process of financial inclusion.
Indeed, the licences given in the first flush of liberalization haven’t changed the level of financial intermediation in the economy.
In this context, the most significant aspect of the Mor report is that it has unambiguously put the Unique Identification Authority of India (UIDAI) at the centre of the process of financial inclusion as it should have been right from the start.
So far banks have not been able to leverage the UIDAI. Indeed, if anything, they have found ways of scuttling it.
It would have been far more useful and relevant for all marginalized sections of society, of which women are the most marginalized, if the government of India had set up an Aadhaar Bank instead of a Mahila Bank which it did in 2013.
To make amends, it will be worthwhile for the screening panel to recommend a banking licence to one of the applicants for setting up an Aadhaar Bank with a much lower capital requirement of Rs.50 crore as suggested by the Mor committee. Perhaps, the ideal applicant for this is India Post with its incredible reach and network. This will give the electronic bank a brick and mortar presence required in the transitional phase.
Alternatively, as suggested in the original discussion paper, one option is to let an applicant take over Regional Rural Banks (RRBs) as an intermediate step.
The 84 RRBs with more than 20,000 branches across 600 districts in almost all states can become the real change agents and provide the base for the Aadhaar bank.
In one shot, this bank will have one third of the branch strength of all the scheduled commercial banks.
In the RRBs, the process of consolidation through amalgamation as well as recapitalization of Rs.1,800 crore is now almost complete. By now, almost all RRBs have been technologically upgraded and have migrated to a core banking solution platform. Additionally, they are operating in a fairly deregulated environment and hence in an ideal position for structural change.
Given this state of affairs—a vast network, greater operational flexibility, an improved balance sheet, a uniform technological platform, the “acquitted and redesigned RRBs” might just be the right institutions for well-grounded financial inclusion of household and small and medium enterprises.
Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice.
To read Haseeb A. Drabu’s earlier columns, go to www.livemint.com/methodandmanner
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