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A committee headed by Reserve Bank of India (RBI) board member Nachiket Mor has drawn up a plan to overhaul the Indian banking landscape. Come January 1, 2016, all resident Indians above 18 years of age will have full-service bank accounts and every accountholder will have an electronic payment access point within 15 minutes of walk — if the recommendations of the committee are implemented.
The Mor committee on comprehensive financial services for small businesses and low-income households, in a report released on Tuesday, recommended some sweeping changes in the present guidelines, such as increasing the priority-sector lending target from 40 per cent of net bank credit to 50 per cent, and doing away with farm-loan subsidies.
“Banks must be required to freely price farm loans on the basis of their risk models and any subvention. And, the waivers deemed necessary by the government should be transferred directly to the farmers and not through interest subsidies or loan waivers,” the report said, adding farm loans should not be priced below the base rate.
After joining RBI as Governor, Raghuram Rajan had set up this panel with some high-profile members like former Citigroup CEO Vikram Pandit and Mahindra & Mahindra Financial Services Chairman Bharat Doshi.
For a country where 90 per cent of all small businesses do not have access to formal finance and 60 per cent of citizens do not have functional bank accounts, the suggestions of the panel, appointed by RBI Governor Raghuram Rajan, could appear too ambitious.
At least two of the panel’s 13 members have gone on record to express their apprehension over this deadline being met.
Axis Bank MD & CEO Shikha Sharma and Bank of Baroda CMD S S Mundra said it might be good to aspire for 2016 but 2018 would have been a more realistic and implementable deadline. The committee also suggested setting up a new types of bank exclusively for low-income households and small businesses, and sought a complete overhaul of the existing norms for non-banking financial companies (NBFCs).
It recommended ‘payment banks’, with the primary objective of providing payment and deposit products, be created. These should be allowed to hold only up to Rs 50,000 as deposits from one customer. These entities should have cash reserve ratio obligations but a lower entry capital requirement of Rs 50 crore, compared with Rs 500 crore for universal banks. “Existing banks should be permitted to create a payment bank as subsidiary,” the panel said.
A new concept of ‘wholesale bank’ was also floated. The primary responsibility of these banks would be lending and they would not be allowed to raise more than Rs 5 crore in deposits from one customer. The panel said wholesale banks with less than 20 branches would be exmept from 25 per cent rural-branch obligation and would be called wholesale investment banks. The ones with more than 20 branches would be called wholesale consumer banks, which could be allowed to act as business correspondents.
On NBFCs, the committee said there should be two categories — one for core investment companies and another for all other NBFCs. It advocated a partial convergence of regulations for banks and NBFCs with regard to classification of non-performing assets, the Sarfaesi Act and eligibility. The panel also called for allowing banks to set up subsidiaries dedicated to financial inclusion, without prior approvals. At present, banks have to take the central bank’s permission to set up subsidiaries but RBI has in recent times not allowed any bank to float subsidiaries which can be undertaken by lenders departmentally.
TOWARDS FINANCIAL INCLUSION
Key recommendations of the Nachiket Mor committee
By Jan 1, 2016
- All Indians above 18 years of age should have full-service bank accounts
- Every Indian should have an electronic payment access point within 15 minutes of walk
- Every district should have a credit-to-GDP ratio of 10% (to go up to 50% by 2020)
- Each district should have total-term-life-insurance-sum-assured-to-GDP ratio of 30% (to rise to 80% by 2020)
- UIDAI to instruct banks to open accounts upon issuance of Aadhar numbers to all individuals above 18 years of age
- Priority-sector lending target be raised from 40% to 50%
- Features like minimum service available, hours of operations, etc, for rural branches
- Non-deposit-taking NBFCs be allowed to act as business correspondents
- Payment banks be created with a restriction to hold only up to Rs 50,000 in deposits per customer; existing banks could have payment banks as subsidiaries
- Banks disclose segment-wise loan concentration in financial statements
- Banks buy portfolio-level protection against all forms of rainfall and commodity-price risks
- Lenders be allowed to float subsidiaries exclusively for financial inclusion
- Partial convergence of NBFC and bank regulations
- Creation of loan-focused wholesale banks that cannot accept deposits of less than Rs 5 crore
