Nachiket Mor panel proposals: Internal dissent on report

Axis Bank & BoB chiefs say many suggestions not practical

The recommendations made by the Reserve Bank of India's (RBI) committee on comprehensive financial services for small businesses and low-income households have failed to impress some of its own members.

The panel, chaired by RBI's central board member Nachiket Mor, issued its report on Tuesday. It envisages each Indian above the age of 18 years having a full-service, safe and secure electronic bank account by January 2016.

However, at least two committee members – Axis Bank chief executive Shikha Sharma and Bank of Baroda chairman and managing director S S Mundra – felt this was too ambitious.

"Looking at the enormity of the task, more particularly in low density rural areas, and the need of supporting physical as well as virtual infrastructure vis-à-vis their present state, the timeline looks pressing," Sharma and Mundra commented in note to Mor. They suggested January 2018 as a more "realistic and implementable" target date.

IN A NUTSHELL

The Nachiket Mor panel draws up an ambitious roadmap for financial inclusion that should be achieved by the end of 2015. The panel also points  out the present status of the banking reach

• Estimates suggest close to 90% of small businesses have no links with formal financial institutions
• About 60% of the rural and urban population do not even have a functional bank account
• Bank-credit to GDP ratio in the country, as a whole, is a modest 70%
• In Bihar, bank-credit to GDP ratio is even lower, at 16%
• Savings as a proportion to GDP has fallen from 36.8% in 2007-08 to 30.8% in 2011-12
• Financial savings of households have declined from 11.6% of GDP in 2007-’08 to 8% in 2011-’12
• Against only 30 million fixed line subscribers, telecommunications companies, now, have over 870 million mobile phone subscribers, of whom over 350 million are based in rural areas
• While the urban number of mobile subscribers stabilised, rural number continues to grow at an annualised rate of 10 per cent

Source: Nachiket Mor committee report

While the committee proposed creation of a payment bank (PB) to provide payment services and deposit products to the target segment, the bankers felt this would not help achieve the desired level of financial inclusion. "The overall objective is to provide access to a complete bouquet of financial services — including credit, insurance and risk management products — which may be difficult to achieve through the PB framework," they said.

Sharma and Mundra also said there was no need to deviate from the proposed provisioning norms for asset classes based on the Advanced International Rating-based approach, though the committee favoured differential provisioning norms at the level of each asset class.

The bankers also questioned the need for banks publicly disclosing the results of their stress tests, as recommended by the panel. "Stress tests are a reflection of a potential adverse economic shock than a projection of the future. Accordingly, public disclosures may cause the market participants or depositors to put excessive weight on select information without appropriately assessing the context, thereby causing speculation and instability, which may induce systematic risk," they said.

The bankers felt the suggestion to create wholesale banks under the Banking Regulation Act would not result in any substantial value-add in achieving the objective of financial inclusion. They said implementation of the proposed adjusted priority sector lending methodology must be staggered over two to three years.

Sharma and Mundra also requested the panel to revisit its proposal of allowing equity investments by banks in complementary infrastructure within the purview of priority sector lending guidelines, as it probably defies the overall regulatory framework. They added that the requirement to conduct a due diligence across all products and geographies might not be practical, due to the paucity of information.

They also suggested exploring possibilities of introducing priority sector deposit products. "We believe (this) would further complement the other measures in the report and ensure a more viable, scalable and sustainable model of financial inclusion," they said.