The committee on financial inclusion set up by the Reserve Bank of India (RBI) three months ago, and chaired by Nachiket Mor, published its recommendations on Tuesday. After the government and the RBI put special emphasis on inclusion a few years ago, the banking system did make efforts to bring large numbers of people into the system, but most observers would agree that it has largely been a numbers game, evaluated in terms of the number of accounts opened rather than effective delivery of financial services. This realisation led to a separate status for districts on the basis of "meaningful" inclusion, with Ernakulam in Kerala being the first to be so recognised in 2012. The roll-out of the direct benefits transfer programme in 2013 and the hurdles that it faced exposed the system further; it just did not have the capacity to take on the load placed on it by the programme. All in all, financial inclusion has been more a slogan than an accomplishment.
The committee is clearly determined to change that in a hurry, setting the audacious goal that all adults will have meaningful access to financial services in two years. Laudable, certainly, but one whose feasibility has been questioned by two members of the committee itself. Be that as it may, it is something to strive for and, if the instruments to achieve them are correctly designed and used, significant movement towards that goal could well be ensured. There are three sets of instruments that the committee proposes. One, it recommends that the priority sector lending mandate for banks should be raised from the current 40 per cent to 50 per cent, but freed from all pricing and other restrictions. In other words, banks will evaluate these borrowers and price loans to them exactly as they do to other borrowers. Given the prices that many borrowers in the priority sector ambit pay for credit, this step will allow banks to compete directly with other channels and will certainly contribute to achieving the penetration objective. Its political saleability will have to be tested, though.
Two, it effectively advances the case for differentiated banking licences, proposing that new categories of banks - payment, wholesale investment and wholesale consumer - be allowed and that the regulations for non-banking financial companies, or NBFCs, be streamlined. Previous experiments with differentiated banking, for instance, the regional rural banks, showed promise but ultimately broke down because their cost structures converged with those of their parent commercial banks. The critical requirement for success of differentiated banking, therefore, is that the business model be commercially viable. Local recruitment and compensation benchmarks will be imperative; none of these will be able to deal with the wage structures of commercial banks. For this reason, while the recommendation that existing banks be allowed to float subsidiaries frees up entry, success is more likely to be achieved by stand-alone, bottom-up organisations, whose challenge will be to deal with the higher prudential regulatory costs.
Three, it suggests specific district-level penetration metrics - the credit-GDP and life cover-GDP ratios - to monitor the progress of meaningful inclusion. Overall, the combination of instruments represents a clear departure from the current paradigm and deserves a shot. Whether the audacious goal will be achieved or not, tangible progress towards it is likely.
