The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, headed by Nachiket Mor, has submitted its report to the Reserve Bank of India (RBI). The appointment of the committee was one of the earliest announcements made by governor Raghuram Rajan after he assumed office in September.
The composition of the panel was unusual and clearly indicated the intent that “business as usual" with committees was not okay. The committee drew heavily on people with international experience, the private sector and those who had resorted to disruptive innovation. If the intent was to bring in an international perspective to inclusion, then governor Rajan should be happy because it achieved exactly that. A perusal of the literature that the committee has consulted, the people they have interacted with and the approach to the problem shows that this report is a significant departure from the normal. It uses financial inclusion as a peg to hand a rather long agenda of financial sector reforms. Nothing less.
It is therefore not surprising that the report seeks to achieve in the next 24 months something that the nation has strived to do in the past six decades. It is not that we have failed in achieving financial inclusion through the past approaches. From a mere 7.2% share that the institutional sources had in the share of rural credit in 1950-51, we almost doubled the share of institutional credit every decade till 1980-81 to reach a 61.2% share.
The share of institutional credit grew marginally in the next decade to 64%. It is only after we adopted the liberalization agenda that the relative share of institutional credit has fallen to 57.1%. It is also interesting to note that in the decade 1991-2001 the relative share of banks fell while the relative share of co-operatives went up. The share of moneylenders went up much more significantly in this period. If we were to just look at these statistics, we have to conclude that while the policymakers moved from one big idea to another (p.3), each of these ideas have delivered. The evidence for this includes the study that is used by the Mor committee report (p.27) by Burgess and Pandey to argue for greater bank involvement to attack poverty. The paper additionally argues that the branch licensing policy, which was centrally controlled and allocated quotas, resulted in escape from poverty outcomes (and not self-sought market opportunities).
The “one big idea approach" of the past five decades— which the committee criticises—has essentially been three ideas; it started with state partnership with co-operatives in the 1950s, followed by the nationalization of banks in the late 1960s and the setting up of regional rural banks in the mid-1970s. All these have produced results. The stagnation in growth has been in the past two decades, where there has been no central big idea.
The Mor committee, however, seems to think that a radically new approach is needed which recognizes the singularity of purpose, but plurality of approaches. While the past policy interventions have been in the nature of incremental and cumulative achievements, the Mor committee seems to adopt the residual and saturation approach. While this aggressive approach is welcome, the committee does seem to underestimate the task involved in covering the residue of uncovered population. It is, therefore, no wonder that the voices of reason come in the nature of an additional note from two members of the panel (the chairman and managing director of Bank of Baroda and chief executive officer of Axis Bank); both can rightfully claim to have a good footprint and are aware of the impossibility of this task in the given time frame.
The approach of the Mor committee is to look at the larger structure available for delivery of financial services, the supporting systems needed and the legal and regulatory framework under which such a system could operate. The approach is neutral to institutional forms. The committee also seeks to externalize all the costs of delivery. It advocates interoperability at the last mile. The interoperability is not only about the access to banking services at a touch point that is 15 minutes away by walk, but also about other financial services. These services are to be delivered ethically without any mis-selling through a concept of suitability. While it has been a challenge to open plain vanilla accounts and get the direct benefit transfers for these customers rolling out, the task of offering a product that passes the suitability criteria is daunting indeed. Clearly the costs of these products as per the tone of the committee report are to be borne by the customer.
The next cost in this rather complex world pertains to the client protection framework. The Mor committee at the base level advocates informed consent and transparency. Let us take the informed consent aspect. All microfinance institutions, including the ones in Andhra Pradesh, always took informed consent of the borrowers, through a public recital of an oath and through reciting the terms and conditions of the loans. Ultimately when the crisis hit the roof, the biggest allegation was about client protection. Therefore the design principles enunciated in the report have to be tempered with reality keeping our conditions in mind.
It is at this point that the counsel of somebody like Ela Bhatt (also a central board member of the RBI) or the counsel of a middle-level manager in the banking system who would have handled a regional rural bank, would have helped.
The Mor committee report impresses to deceive. It is a good academic work that lays a broad design principle, but does not look at the gorilla in the room. This gorilla is the last mile delivery. Unfortunately this aspect is couched in a lofty vision statement putting all its eggs in the Aadhaar basket. There is much more to inclusion than electronic transfers and Aadhaar. The report provides lip service to the last mile and concentrates on financial sector architecture. If only this had been flipped and a large part of the report had focused on the last mile, the architecture could have been fixed in Basel.
M.S. Sriram is with the Centre for Public Policy at Indian Institute of Management, Bangalore.