L4 P2 Nachiket Committee
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• GS2: Issues relating to poverty and hunger. • GS3: Inclusive growth and issues
arising from it.
• Committee on Comprehensive Financial Services for Small Businesses and Low Income Households• Nachiket Mor : board member RBI• Member 12 :NABAD, BoB, Axis
Bank, CRISIL, Std.Chartered.
Nachiket Mor Committee
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What is financial inclusion?• BANKING Savings & payment-through
branches, ATM, cheques, e-transfer
• CREDIT Loans at affordable interest rates.
• INVESTMENT mutual funds, pension plans, child investment plans etc.
• INSURANCE Life insurance and non-life (general) insurance.
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Why financial inclusion?• Savings into investment• Unforseen circumstances• Japan, S.Korea, USA• Vs Money lenders• E-Payment: Cashless subsidies, payments, salaries: Rs.1 lakh cr
(Mckinley study)• Lack of formal channels to save money=>Ponzi scheme, MLM,
Saradha Chit fund, Zaheer Rana, Abhay Gandhi, Ashok Jadeja.• Social harmony• Empowerment
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Financial inclusion So far: Banking• Post office savings account, money transfer, provident fund, insurance• Nationalization of banks and insurance companies.• RRB, Cooperative Banks, PACS• No Frills accounts for poor people. Later renamed to Basic Savings Bank Deposit
Account (BSBDA).
• DBT=> open account• KYC norms relaxed, Documentary proof.• Aadhar can be used to open bank account
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• 69: Lead bank scheme• 2005: No frills Acount• 2006: BC• Act as representatives of Banks• Account, deposit, payment, loan
processing,• PoS/ Handheld
computer/Biometric.
Who can become?•NGO, SHG, MFI, Post office, insurance agent•Panchayat•Cooperative society.
Bank: Business Correspondents Agents
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Financial inclusion: Banking= Swabhiman• Initiative by the Finance Ministry + Indian Banks’ Association• launched in 2011• [pop.2000], 70000 habitats: March 2012• UIDAI/Aadhar card=>Bank account.• BC (bank Saathi)=> payment, subsidies, loan applications.• Financial literacy, loans to small marginal farmers.• Government gave Rs.500 mn to banks: training, commission,
paperwork
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Banking services: White Label ATM• Don’t have bank logo• 80s: first ATM in India• 2012: Guideline; 2013: License• Tata => Indicash.• Muthoot Finance, Srei Infra., Prizm Payments, >15• open 2/3rd of these ATMs in semi urban and rural areas.• RBI has ordered the banks to open at least 25 per cent of their new branches in unbanked rural centres.
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Financial inclusion: Credit services (loan)• PSL targets 40%• 90s: SHG Bank linkage program. NABARD provides funding• KCC, GCC for loans.• 2011: RBI introduced new category: NBFC-MFI • Interest subvention scheme• Debt waiver (2008)• Mahila bank in 2013• Loans without collateral upto 1cr for women
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Investment
1. Post office, PPF, NPS (Swavalamban)
2. UTI: Public owned Mutual fund company
3. RGESS, 4. Inflation indexed bonds5. Financial literacy campaign by
SEBI and RBI
• Nationalization• Post office: has tied up with LIC,
e.g. Gram Surakha, Suvidha, Sumangal etc.• Weather based crop insurance
loans for farmers.• Aam Admi Bima Yojana• Rashtriya Swasthya Bima Yojana
(RSBY)• Rajiv Gandhi Shilpi Swasthya
yojana (Health insurance)
Financial inclusionInsurance
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Mock Question (2012)The basic aim of lead bank scheme is thatA.Big banks should try to open offices in each districtB.There should be stiff competition among various nationalized banksC.Individual banks should adopt particular district for intensive developmentD.All banks should make intensive efforts to mobilize deposits.
1. Skip 2. Attempt 3. Mark n Review
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Financial inclusion: short comings• Census 2011 Banking services1.67% urban households2.54% rural households3.Regional variation: Nagaland 0%; S.W.India 70% adults4.Small Marginal Farmers did not benefit much.
• + Ponzi scam, MLM.
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Nachiket Committee: 6 Point VisionTopic Vision StatementBank account A Universal Electronic
Bank Account by 1/1/2016
Access to bank 15 minutes walking distance (400)Payment Banks
Easy loans PSL 50%investment Wholesale Banks
1/1/16Broker model, Cross-KYC
insurance
consumer rights Financial Redress Agency (FRA)
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UEBA
• Universal Electronic Bank Account• 1/1/2016; Adult resident• Aadhar => UEBA, choice of bank• SBI, BoB, Axis• Open..free, transactions….x
• 400 people• 15 minutes walking distance• Deposit, withdraw, transfer• Free…..x• Examples: bank branch, BCA,
mobile shops, Panchayat, Post Office, Kirana, retired school teacher.
Banking ServicesAccess point
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Challenges?
• Penetration• Electronic infra.• staff• Naxal• Shikha Sharma: 2018
• 35/85 rural mobile; 10%• 2014: National Optical fiber
network (NOFN).• All 2.5 lakh gram Panchayats
=>broadband internet=>• e-banking• Setup Payment Banks.
BankingPotential
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Payment Bank (Suggested)Commercial Banks Payment Banks
Target audience: all Small businessman, low income households.
-- Cannot hold more than Rs.50k / customer
Can give loans Cannot assume credit risk. (SLR)
Entry capital Rs.500 cr 50 cr.
CRR 4%, SLR 23% CRR yes, SLR eliminate
PSL 40% N/A.
Payment Banks: who can get license?1.mobile phone companies, consumer goods companies, post office system, 2.agriculture/dairy type cooperatives 3.Even Scheduled commercial banks via Subsidiary.
Criticism: cannot give loans, existing SCB sufficient. Counter: RRB; m-Pesa (Kenya)
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Credit (Loans): PSL (existing setup)1. Agriculture and allied activities: (dairy, fishery, animal husbandry, poultry, bee-keeping
and sericulture.): direct vs Indirect2. Micro and Small industries (upto 2 crores)3. Education loans (10 lakh in India, 20 lakh for going abroad)4. Housing loans (upto max. 25 lakh in metropolitan cities)5. Renewable Energy: Loans for solar and renewable energy solutionsWeaker Section:
1. Small and marginal farmers;2. Artisans, village and cottage industries3. Women, SC/ST, minorities, SHG4. Distressed borrowers5. NRLM etc. beneficiaries
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PSL Targets (existing)Target Desi Banks. (+foreign
banks with 20/>)Foreign banks <20 branches
Agro 18% No specific targetsWeaker sections
10% No specific targets
Remaining categories under PSL
Whatever left to reach the 40% target
No specific targets
Overall PSL target
40% of net loans given 32%
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DESI + Foreign > 20
• RIDF; NABARD• State government• interest
• SEDF= small enterprises development fund; SIDBI
PSL: what is targets not met?Foreign < 20
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PSL: additional safeguards• Arrange photo• SC/ST application: branch manager can’t disapprove• Disaster, loan restructure• Penal interest ….x (25k)• Regional level: complaint• Maintain database. RBI can inspect.
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PSL: ProblemFinancial inclusion District Direct
agri. Weaker section
Other sectors
highest Pattanamthitta, Kerala
1.25 1.1 1
high Namakkal, TN 1.38 1.21 1.10medium Rajkot, Guj 1.43 1.25 1.14medium Muzzaffarnagar,
UP1.46 1.28 1.16
lowest Kurung Kumey, Arunanchal
1.56 1.37 1.24
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Raise PSL to 50%Earlier PSL-system (40%) New (adjusted) PSL system (50%)
Whether SBI gives loan to farmer in Assam or in TN, its counted one and same.
hardship area will get more weightage.
40%=40 crores target 50%=50 crores target
To reach this target, SBI will have to give away exactly 40 crore rupees.
Not necessary to give exactly 50 crore rupees. Suppose SBI focuses only where they get multiplier of at least 1.3. 50 crore / 1.3 = approx. 38 crores.
Meaning, only 100-40=60 crore left for giving out as 'normal' loans (car loan, business loans etc. where SBI earns more profit margin)
, 100-38 crores=62 crores left. So additional two crores for giving out as "normal" loans=more profit than previous (40%) system.
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Raise PSL to 50%• Replace 40% PSL requirement with 50% Adjusted PSL (APSL), • Provide multiplier benefit to bank’s APSL targets, for serving loans in
hardship areas.
Other• Debt relief….x• Interest subvention….x• Relief: DBT…yes• All defaulters: CIBIL.
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1. Real interest rate positive.2. Only two categories of NBFC:
core vs non-core.3. Wholesale Banks,
Securitization, PSL.
#4: Investment
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Corporate Agent Model
#5: InsuranceFeatures
• One bank ties up with• One life insurance• One non-life insurance
• E.g. HSBC: Tata AIG general insurance.• Problem: Customer deprived of
choice. Bank not liable.
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Broker Model
#5: InsuranceFeatures
• Choice, protection, bank liable • FM announced permission in
2013 budget• RBI also gave permission• But banks reluctant. (training,
MoU)• IRDA – make compulsory.
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#5: Insurance, Nachiket1. Broker model right.2. By 1/1/16 provide insurance services to all (life, general, cattle,
crop, property.)3. Cross KYC4. Allow NBFC to accept deposits (e.g. while selling insurance policies under broker model.)
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Financial Products: Consumer protection: why?ULIP ~15 years. But 40% commission within first year.Insurance, child investment product
Real interest rate….xFace value of money ….yesReal value of money…no.
Saradha Group Chit fund, 15 lakh people lost moneyBanks Corporate agent model.
One bank- one insurance company. Choice ….X
Teaser loans Proper Credit record verification…..XRecovery agents Abuse.
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Financial Products: Consumer protection: How?Solution ProblemInformation disclosure, brochure technical jargon.
Terms and conditions….Rs.3000 cr.Financial literacy SEBI and RBI already trying.
But information asymmetry between buyer and seller.
TCF: Treat your customer fairly (RBI guideline’13)Provision•Just because client signed the form, doesn’t absolve thae bank.•Bank must provide they acted in best interest.
Problem:-Penalty no.-Australia…No doc, teaser loans. Consumer court.
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Right to suitability
• put the onus on the seller to ensure that Customer is indeed suitable for the given product (insurance policy, mutual fund, ULIP etc.) • don't sell everything to
everybody. • customer must have a Right to
Suitability. • Otherwise penalty.
• To Banks, NBFC• Salary bonus motivates to
misguide• Internal mechanism for
Consumer complaint • Paper record of everything.• @RBI- surprise audit, cancel
licenses.
Nachiket: SolutionAgent guidelines
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Consumer rights protection @present:
stage Banking(RBI) Finance(SEBI) Insurance(IRDA) NPS(PFRDA)
1 In house SCORES (SEBI complaints redress system) webportal
Inhouse NSDL
2 Banking ombudsman
SEBI tribunal IDRA Grievances cell | Insurance ombudsman
PFRDA
3 Consumer court
Securities Appellate Tribunal (SAT)
Consumer court Consumer court
4 Court of law Supreme court Court of law Court of law
+ NABARD, SIDBI, NHB are also involved in regulation, as subsidiaries of the RBI. + As many as six Ministries of the Government of India and State Governments also involved.+ consumer courts also involved.
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Regulatory bodies: problems?• Overlapping jurisdiction, delays. Lack of coordination.• NBFCs (non-banking financial companies e.g. Mutooth finance.)
Because • They don't fall under Banking ombudsman.• They mostly serve rural areas. • Villagers are not even aware of the consumer rights. +• they don't have the time or money to visit city, complaint to RBI's regional
office or contact any lawyers.
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Financial Redress Agency (FRA)• independent of all regulators. (RBI, SEBI, IRDA etc.)• unified grievance redress system for the entire financial system • FRA will be managed by a board of directors. • When FRA body has acquired sufficient expertise, give powers of
consumer court.• Similarly, At state level, there are multiple regulatory bodies for NGO-
MFI, chit fund etc.• Nachiket recommends all such bodies be merged into a single State
Finance Regulatory Commission (SFRC).
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Nachiket Committee: 6 Point VisionTopic Vision Statement
Bank account A Universal Electronic Bank Account by 1/1/2016
Access to bank 15 minutes walking distance (400)Payment Banks
Easy loans PSL 50% (multiplier)
investment Wholesale BanksInsurance for all: 1/1/16Broker model, Cross-KYCinsurance
consumer rights Financial Redress Agency (FRA), right to suitability
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Mains Question• GS2: Issues relating to poverty and hunger. • GS3: Inclusive growth and issues arising from it.
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Question• Explain the importance of Financial inclusion in achieving Inclusive
growth for all, and Enumerate the recommendations of Nachiket Committee recommendations in this regard. (10m| 200 words)
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Fin. inclusion =>inclusive growth• Define inclusive growth. Give depressing
numbers. India vs Bharat.• Financial inclusion- explain. • Connection between Financial inclusion vs
Inclusive growth1. Easy loans=>small businessman, low income
groups=> growth, social harmony, naxal.2. DBT, subsidy leakage prevented. (Bank
account)3. Investment, insurance product=>unforeseen
circumstances.=>Poverty combat.4. Ponzi schemes, women empowerment.
What to write?Nachiket’s recommendation?
• Official name of the Committee• Salient recommendations are:
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must
• SLR removal• Difference between SCB vs
wholesale/payment banks.• Insurance Broker model, allow
NBFCs to accept deposits.
Nachiket’s recommendationsNot necessary
• UEBA: 1/1/16 (mechanism)• 15 minutes walking distance (400
people); access points examples• Payment banks- (not all details)• PSL: 40 to 50; with target multiplier
benefit given to banks if they serve loans in hardship areas.
• Wholesale bank to help retail banks achieve their PSL targets.
• + ve real interest rate.• Insurance services to all by 1/1/16. • Financial Redress Authority.• Conclusion
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Interview• 100% financial inclusion vs 100% literacy. Which one will you pick
first, as the prime minister of India? and why?• Do you think higher literacy levels and financial inclusion are directly
related with each other? Yes/No and Why?• If yes then why North Eastern States have performed relatively low on
the parameters of financial inclusion, despite having relatively higher education levels? • As a policy maker, what will you do, to fix this anomaly?