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Nachiket Mor says the report on financial inclusion considers every single channel that exists today and has seen what can be done to strengthen the channels and make them more effective. Photo: SaiSen/Mint
Nachiket Mor says the report on financial inclusion considers every single channel that exists today and has seen what can be done to strengthen the channels and make them more effective. Photo: SaiSen/Mint

We have suggested logical next step, not sweeping reforms: Nachiket Mor

Mor talks about the vision of the report on financial inclusion and justification for the recommendations

New Delhi: The report on financial inclusion submitted recently by the Nachiket Mor committee has generated a lot of public debate on the viability of the panel’s recommendations.

While the committee did not have enough time to look at a radically different design in the way banking is done in India, the report has suggested a series of small, easily doable steps to increase financial inclusion in a country where about 40% of the population do not have access to formal banking channels, Mor said in an interview.

Mor, a central board member of the Reserve Bank of India (RBI), also talks about the vision of the report, justification for the recommendations and why two of the committee members, who were involved in drafting the report, chose to differ. Edited excerpts:

What have you aimed to achieve through this report?

The report in some ways has an incremental character. A lot of what we say in the report are small steps. If somebody was expecting sweeping reforms, we have not got that. Basically, it is anchoring the current reality of India and the current reality of banking, and recommending a series of small steps. I also feel that it is an opportunity because, in some ways, what we are saying (is) that you don’t have to do a lot of thinking but just take one more step from what you are already doing. The other opportunity is that fortunately we are at a good time where a lot of underlying things are going on. We have talked about it in our report as well that things such as Aadhaar, Bharat Broadband and the whole mobile usage offer great opportunities for us to come at this time. We have got some good experience with experiments with business correspondents (BCs) and pre-paid instrument (PPI) issuers. It is a good time for people like us to come along and recommend something that fortunately can happen. While the series of steps are incremental, the net design that emerges certainly has much more open character. Earlier you could say that BCs and banks will do it but now we realize that you need many irons in the fire and let the market figure it out what is the right answer. I mean don’t sit centrally and run the banking system—be the referee and not the captain of the team. That’s a little bit of a change and that’s not how traditionally we thought about this whole thing. But when will that shift happen, we will have to see.

Do you think that a more radical overhaul may be needed later?

You may say that what big change are we proposing. Somebody may say that for the past 60 years we have been trying incremental steps and all you are proposing is another small step. Clearly in a 2-3 month time frame, we could not spend much time to look at a radically different design of the way in which this needs to be done, we could not do that if at all the governor was expecting that. In the priority sector, we came close to a fundamentally new approach but even then we had to leave it for a future design discussion. We did not have enough time to think it through. Though we have recommended something which we think is an incremental change from the current approach and doable immediately but we need a bigger discussion which we have left for a future conversation.

How would you justify the weighted target for priority sector lending?

We have not changed the guidelines itself. So, for example, say you decide that you do not want to do agriculture and only want to do SME (small and medium enterprise) and want to do only in Mumbai, then you have to do 50% of your bank credit and you will not get any extra weightage. But say you want to go to Arunachal Pradesh and want to do SME, then you will get some benefit. Let’s say the maximum weight is in direct agriculture, but you still have to do 32% in order to get your 50 points. So it is not that much of a change from what we have right now. The basic concern that we are trying to respond to is that the structure that we have today requires every bank to do everything. I think we are not building specializations that are required. We think that in agriculture, say, a Bank of Baroda could really become a specialist. It may say that it does not want to do SME as the NPAs (non-performing assets) are too high and it does not understand SME but understands agriculture, knows what is going on and can deal with rural audiences. Whereas an HSBC may say that it does not understand agriculture and wants to focus on small businesses. The issue really is to allow banks to specialize because we know that all of them are not good at everything, and make sure that the national importance is reflected by the differential weight. The idea is to find a mechanism through which we make banks to focus on a category by incentivizing them to do so.

What do have in mind when you say “payments only" bank?

India has already been doing it for 4-5 years now. All the mobile wallet and mobile money companies—what we call PPI—are already operative. What they don’t have is cash-out capability and we are saying to allow them to do so. When you allow cash-out, it amounts to giving them a banking licence. Actually it is becoming a norm worldwide. People have realized that maximum innovation in payments will happen through multiple players. Banks will do some of it and non-banks will do some of it. So, if you bring in a player like, say, Airtel Money, you are able to get the benefit of its reach in the system and you can piggyback on it while actually not taxing your existing banking system. So our basic goal, if you look at the payments bank or the wholesale bank, is to treat it as a progression to the current PPI and NBFC (non-banking finance company) as a next step towards becoming a full-fledged bank. Some of them may not wish to do so and remain what they are now.

Mobile money has not really worked compared with a brick and mortar structure.

We have not really tried it out. We have not allowed these companies cash-out so they don’t have a proposition to offer to the customer. But wherever these companies have been given permission, they are doing really well. We have not really given the notion of a mobile money company offering full service savings account, deposit account and cash-out. We have gone several steps and it has worked very well, but we have not gone that far. Worldwide, clearly the experience is that they have worked as a house on fire. Kenya is a favourite developing country example people give where people have switched so rapidly, which is unbelievable. I think 50% of the GDP (gross domestic product) value now goes through the mobile phone. So if you look at the character of our report, we have considered every single channel that exists today and seen what can be done to strengthen the channel and make them more effective. We have not picked a winner because the regulator’s fundamental philosophical approach of picking winners is not the right approach. Who knows that PPI may work very well in, say, Maharashtra and Uttar Pradesh but may not work in Kerala and they may want brick and mortar or something else. A business correspondent is nothing but a version of PPI but does not have the deposit capability and acts on behalf of a bank. For brick and mortar, the evidence seems to be clear, if you go with traditional brick and mortar approach, you are not able to make it viable.

Why did two of the committee members differ?

We have said that by 2016 we will have universal bank accounts. Our logic is very simple—Aadhaar is expected to be complete by 2015 and we are saying that why not we exploit that fact. The data is already being collected so why not go ahead and give out bank accounts. One may say that why not give 1-2 years more and one may debate that but our view was that we have a logic for 2016. Remember that they have not submitted a dissent note and have signed the report. So there was no issue with that. Their concern was that why not we allow a couple of more years for implementation. That is the spirit in which I saw their comments. But fundamentally we agreed with the notion that giving out an electronic account automatically makes a lot of sense.

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