Reorganising bank selection advisory panel is a good governance imperative for the RBI!

Ramesh S Arunachalam

There is a common misconception that conflict of interest only arises if a person has done something improper. The answer is a big NO! Perception is a very critical aspect to the notion of conflict of interest

In the last few Moneylife articles, we have been talking about the issue of conflict of interest with regard to the recently appointed RBI financial inclusion committee and in this article I focus on the RBI banking selection advisory panel. At the outset, I would like to state that serious conflicts of interests exist because one of the members of the banking selection advisory panel, Dr Nachiket Mor, is also chair of the RBI financial inclusion committee which has two members who have directly applied for the banking licenses. Further, several members of the above mentioned RBI financial inclusion committee have a relationship to these and other banking license applicants. The key relationships have already been highlighted in the previous money life articles and the interested reader may refer to these for understanding the exact nature of the various conflicting relations -  RBI’s New Financial Inclusion Committee: Rife with conflicts of interests,  Does the RBI know how much conflicts of interest it has created? and Why should RBI immediately disband newly appointed Committee on Financial Inclusion?

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Why should RBI immediately disband newly appointed Committee on Financial Inclusion?

Ramesh S Arunachalam

Many of the past crisis situations can be linked to lax and laissez-faire regulatory and supervisory frameworks that had either been developed by industry insiders with commercial interests and/or been created with significant input from such insiders - both with a view to benefit the overall industry concerned!

Conflict of interest is an area of significant importance to regulatory ethics and this is something that the Reserve Bank of India (RBI) needs to note with urgency because there are significant conflicts of interest in the both the recently appointed financial inclusion committee as well as the banking selection advisory panelⁱ. If not eliminated, they could spell disaster for the larger Indian financial sector. And this article is a means to record the above warning publicly!

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The MFI Development and Regulation Bill-Part 1: What the Parliamentary Standing Committee on Finance should note?

Ramesh S Arunachalam

Given the lack of a clear national microfinance policy guiding its overall strategy and implementation, the MFI Development & Regulation Bill is indeed a hugely incomplete legislation. Let’s hope that the Parliamentary Committee takes note of these aspects and ensures that these are properly redressed, before the MFIDR Bill is passed

The Micro-finance Institution Development and Regulation Bill (MFIDRB), 2012 was introduced in the Parliament 2012 and is currently being examined by the Parliamentary Standing Committee on Finance (PSCF). In a series of articles, we look at the MFIDRB (2012) and try to briefly answer the following questions…

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Urgent need for RBI to focus on quality and impact of financial inclusion efforts

Ramesh S Arunachalam

While Dr Raghuram Rajan, the new governor of RBI emphasising on inclusive growth and development is good news, the central bank needs to focus on quality and impact of financial inclusion services that would be easy to access and  compatible with the needs of customers

Dr Raghuram Rajan, the governor of Reserve Bank of India (RBI) in his inaugural speech, talked about the central bank’s “two other important mandates; inclusive growth and development, as well as financial stability. As the central bank of a developing country, we have additional tools to generate growth – we can accelerate financial development and inclusion. Rural areas, especially our villages, as well as small and medium industries across the country, have been important engines of growth even as large company growth has slowed. But access to finance is still hard for the poor, and for rural and small and medium industries. We need faster, broad based, inclusive growth leading to a rapid fall in poverty.”

This needs to be strongly appreciated as it brings into focus the critical issues of quality and impact of financial inclusion, which have hitherto been ignored so far. But before we get to this, let us first understand the scope of financial inclusion in India, as of today. Typically speaking, the scope of financial inclusion (FI) in India involves the following and related services (not exhaustive):

1. Access to accounts: a) Savings (No frills etc); and b) Current accounts.
2. Access to  deposits: a) Fixed deposits; and b) Recurring deposits
3. Access to transaction banking: a) Use of cheques, demand drafts and other such instruments; b) Receiving of social security (NREGA and other) payments through bank accounts; c) Transfer of money through RTGS or NEFT and remittance services; d) Debit cards and ATM usage; e) Credit cards including KCC and GCC; f) Bill payments through technology banking - mobile banking, internet banking etc
4. Access to credit facilities: a) Typical priority sector loans for agriculture and allied areas etc; b) Post harvest, post production loans; c) Loans for marketing of agricultural and other produce etc; d) Traditional working capital limits; e) Traditional MFI loans under priority sector; f) Traditional SHG bank linkage program loans; g) Loans from specialised credit and other cooperatives; h) Traditional MSME loans backed by credit guarantee from Government of India; i) Housing/mortgage loans; and j) Various kinds of overdraft facilities and so on;
5. Access to risk management services: a) Life insurance; b) Health insurance; c) Asset insurance; d) Crop and weather insurance; e) Livestock insurance; f) Other such products such as credit insurance; and g) Micro-pensions
6. Access to other Services: a) Deposit insurance; b) business facilitators (BF) and business correspondents (BC); c) financial literacy services and credit counseling (FLCC) centers; d) grievance redressal, ombudsman and legal aid services; e) credit bureau; and f) Other services

The above services can be acquired through various institutions such as (but not limited to) the following: Commercial Banks, Regional Rural Banks (RRBs), Cooperative Banks, Local Area Banks (LABs), Post Offices, State Cooperatives, Mutually Aided Cooperatives, Multi-State Cooperatives, Investment Grade NBFCs, NBFC MFIs, BCs/BFs, Other MFIs, SHGs and so on. Not all services can be provided by all institutions but that is an issue that I deal with later, in a separate article

Having set the broad context, I want to emphasise the fact that we urgently need comprehensive baseline data regarding the number/proportion of mutually exclusive individuals/households (among low income people) and mutually exclusive small businesses who have accessed the above financial inclusion services from various institutions in any given year! Apart from serving as an important baseline, such data would also help us understand which of these financial inclusion services and institutions are preferred by different groups of low income people. So, this is an important task for the RBI under Dr Rajan. Therefore, instead of wasting time on organizing yet another financial inclusion committee and managing its cumbersome administration, the RBI would perhaps serve the nation better by setting in motion processes that would help in the above. That is not all. 

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A practical agenda in financial inclusion: What RBI Governor Dr Rajan needs to do?

Ramesh S Arunachalam

Dr Rajan’s first task would be to ensure that the RBI puts out a proper working definition of financial inclusion. Without proper baseline data, quoting facts and figures is meaningless as then, we would not be able to attribute whether financial inclusion occurred because of something we did consciously or it was simply an accident and/ or act of GOD

There is a lot that Reserve Bank of India (RBI) governor Raghuram Rajan can do to bring transparency to the financial inclusion process. I say this, notwithstanding the issues that I have already raised about composition of the Committee  and the conflicts of interest of its members.  Let me start with the definition of financial inclusion and data pertaining to the same, as my first article of a series that will look at measurement of financial inclusion and related aspects.

Without a clear definition of financial inclusion and good ground level data, much of what we say in terms of inclusiveness in the financial sector is analogous to writing on water. Additionally, without proper baseline data, quoting facts and figures is meaningless as then, we would not be able to attribute whether financial inclusion occurred because of something we did consciously or it was simply an accident and/or act of GOD.

Having an internally consistent definition of financial inclusion is very critical. And generating data based on the same is even more important. Together, these can form the basis for our opinions and judgements, which in turn can shape policy and subsequent implementation appropriately.

It therefore follows that we first need a reliable and valid definition of financial inclusion in terms of type of products and services (for example, it could be loans, savings, insurance, remittance, literacy and financial education services, ombudsman services etc) accessed through different institutions (Banks, Insurance Companies, SHGs, MFIs, Business Correspondents, Cooperatives etc) by various kinds of mutually exclusive individuals/households from different segments of society (especially, low income and excluded groups).

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RBI’s New Financial Inclusion Committee: Rife with Conflicts of Interests

Ramesh S Arunachalam

While Dr Raghuram Rajan is trying to give out banking licences in a fair and transparent manner, several members of the newly appointed financial inclusion committee are associated with groups looking to get a banking licence. The institutions that some of the committee members are associated with are focusing on the micro-finance/financial inclusion segment for their commercial interests, creating more potential conflicts of interest

I was impressed when Kumar Mangalam Birla, chairman of the Aditya Birla Group, resigned from the Reserve Bank of India (RBI)’s central board of directors. He had been appointed to the Central Bank’s board in June 2006. The resignation came several weeks after one of the companies in his group—Aditya Birla Nuvo—had applied for a banking licence. The group and company had all along maintained that there is no conflict of interest though. However, when the Chairman of a Group which applies for a Banking license has been serving as a Director of the RBI for the last several years and continues to be a director even while the applications are being processed, there is most certainly a conflict of interest. Anyway, it was good that finally Mr Birla resigned and with that the conflict of interest issue concerning ‘new banking licenses’ appeared to have died down.  Or so one thought!

Dr Raghuram Rajan’s speech on 4^th September assured that a highly transparent process would eliminate conflicts of interest in the grant of banking licenses. He said, “The RBI will give out new bank licenses as soon as consistent with the highest standards of transparency and diligence. We are in the process of constituting an external committee…this committee will screen licence applicants after an initial compilation of applications by the RBI staff. The external committee will make recommendations to the RBI governor and deputy governors, and we will propose the final slate to the Committee of the RBI Central Board.”

 

Well, since Dr Rajan raised a lot of expectations, we only wish conflicts of interests would be eliminated elsewhere too. The fact is, several members of the recently appointed RBI financial inclusion committee have direct (as well as indirect) links with institutions that have applied for (and/or partnered with others in the application for) banking licenses.

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RBI’s New Financial Inclusion Committee: Bypassing the Parliament?

Ramesh S Arunachalam

There is a Microfinance Bill promoting financial inclusion pending in the Parliament. There is also a financial inclusion committee of the RBI currently live, under Dr KC Chakrabarty. So, how appropriate was it for the new RBI Governor to announce another committee on financial inclusion?

Dr Raghuram Rajan made a brilliant speech, when he took over the as the Governor of RBI on September 4^th. TV Commentators were comparing his first day at the RBI as akin to a century on debut (in Test cricket). Dr Rajan was indeed impressive in the way he laid out his plan. One of his moves was to request Dr Nachiket Mor to chair a committee on financial inclusion “that will assess every aspect of our approach to financial inclusion to suggest the way forward. In these ways, we will further the development mission of the RBI”.

The committee headed by Dr Nachiket Mor is a committee on financial inclusion, irrespective of whatever it is called. A look at the terms of reference put out on the RBI website clearly suggests that the committee has a mandate to build a vision for the financial inclusion, set design principles for regulation and suggest a monitoring framework, amongst other things. The focus is to be primarily on poor, vulnerable, marginalised, excluded etc and small businesses. While I applaud this effort, I am worried on several counts and these are articulated in a series of articles, beginning with this one.

We first look at whether the Governor’s (and RBI’s) announcement of the new committee on financial inclusion is a case of pre-empting the Parliament. After all, the Micro-Finance Institution (Development and Regulation) Bill (2012) - MFIDRB (2012) – was introduced in the Lok Sabha in 2012 and has been referred by the Speaker to the Parliamentary Standing Committee on Finance (PSCF). The preamble of the bill  states: A BILL to provide for development and regulation of the micro finance institutions for the purpose of facilitating access to credit, thrift and other micro finance services to the rural and urban poor and certain disadvantaged sections of the people and promoting financial inclusion through such institutions and for matters connected therewith or incidental thereto.” 

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Folks, I Am Back in Circulation...

Dear Friends

It has been a long time since I posted and the good news is that I will be restarting my blogging/writing from the last week of March 2013

The break of over a year has been wonderful and I am refreshed and enthusiastic

Do watch out for articles on Financial Inclusion, Micro-Finance, Regulation and Supervision in the Financial Sector, Farm Loan Waivers and the discrepancies therein (about which I incidentally did write about as far back as 2010), credit bureaus and their functioning and the like - both at this blog and also at Moneylife.

The 2nd edition of my book is titled

"An Idea Which Went Wrong: Commercial Micro-Finance in India" is under process and should be out in the stands by Mid or End May 2013. The book is about 370 pages (10inches by 8inches) and what differentiates it from the past edition are seven features: a) Sharpened analysis; b) Crisp professional editing; c) No anonymous names and all statements and inferences are transparent; d) Focus on the entire value chain in the low income financial sector including MIVs and others and their regulation and supervision; e) Objective updation of the situation in India as on date with a focus on the proposed Micro-Finance Bill; f) Lessons for the global community from India's Commercial Micro-Finance Experience; and g) A full chapter on impact. I have taken all the feedback received very seriously and must place special emphasis on the fact that this second edition would not have come out but for the persistent admonition from a couple of Journalist friends - who prefer anonymity - that there would be consequences if the book did not come out on time. A sincere thanks to these friends indeed!

Thanks folks and look forward to being in touch with all of you hereafter again! There will be an e book version that should be priced around US $ 7 - 9 and trying to ensure that the printed version does not cost more than US $ 15 - 18 so that it can be widely accessed and used.

I have made sure that the book is available nationally and internationally across a range of retailers and stores. Watch this space for more updates and active promotion will be evident from mid-April and you will be able to pre-order the book after mid-April 2013

Look forward to your feedback on the book

Warmly

Ramesh