Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Monday, September 30, 2013

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).


Friday, September 27, 2013

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 4th 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.


Thursday, September 26, 2013

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 4th. 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.”