Nachiket Mor suggestions are a welcome relief
With close to 90% of all small businesses having no links with formal financial institutions and 60% of the population with no functional bank account, it is obvious the current system, including that of priority sector lending, is simply not working. Which is why the Nachiket Mor committee reiterating the view that India needs differentiated banks is welcome. On the face of things, the committee’s vision that every Indian adult must have a full-service electronic bank account by 2016—the payment outlet must be within 15 minutes walking distance from where she lives—is absurd. But once you keep in mind that India has over 600 million unique mobile phone users, and the committee is looking at the possibility of giving banking licences to mobile phone companies, the vision statement looks eminently doable. While the concept of a ‘payment bank’—whose main job is to accept retail deposits up to a maximum of R50,000, invest this only in SLR securities and not do any lending—looks unviable initially, it works very well for a mobile phone company which essentially wants to help transfer money for low-income groups. Right now, this is stuck with RBI insisting telcos partner with full-service banks. But once these firms are ‘payment banks’, this problem is taken care of; since the money they collect can only be invested in SLR bonds, this takes care of the security of the deposits.
Similarly, the concept of ‘wholesale banks’, where the bank is allowed to take only large deposits of over R5 crore and use these to lend to retail, works very well for large NBFCs involved in, say, truck financing. And getting bank status gets them out of the clutches of state governments—since they will be regulated by RBI, this means the kind of problems that SKS had in Andhra Pradesh with the state cracking down on it will not happen again. In both wholesale and payment banks, given the relatively smaller level of risk they carry, the minimum capital requirement is to be R50 crore as compared to R500 crore for a full-service bank. Since RBI has accepted the Aadhaar number as a valid KYC, the bulk of the cost of opening a bank account has been taken care of by UIDAI; it is running these accounts, however, that remains an issue—the committee has made a valid suggestion that banks should charge for each service. The optics may be poor, but the option is not to have functional accounts as is the case right now.
The recommendation to hike priority lending to 50% is the most controversial, but this is smart thinking since this is a weighted target. So, if a bank lends R100 to a farmer in prosperous Haryana, it will be considered as lending just R100 to the priority sector—but if this is done in poor Bihar, this could be considered worth R135. So, a bank lending to more difficult areas will get more credits—while the 50% target can be questioned since it leaves little for banks as 27% of funds are taken away by SLR and CRR, the idea of weights is appealing. Freeing up priority sector lending rates—the government is free to give whatever subventions it wants directly to borrowers’ Aadhaar-enabled accounts—is another optically poor idea but essential if credit flows to vital sectors are actually to be achieved.