India's Regulator to do More on Inclusion and Innovation
In December 2015, the Reserve Bank of India (RBI) took more steps that could be considered innovation-friendly.
First, a committee on financial inclusion released a report that puts forth some specific short-term measures the RBI can take to advance financial access, a number of them with an eye to enhancing digital finance and encouraging innovation. Second, the RBI launched a competition on payments innovation, a first of-its-kind effort to push newer ideas in the payment space.
The committee report on medium term financial inclusion vision of the RBI had the following key themes:
1. Aadhaar is the centrepiece of cost-effective biometric identification. The report recommends linking Aadhaar to individual as well as micro- small- and medium- enterprise (MSME) accounts as well as to improve efficiencies for credit supply to the agricultural sector and reduce over-indebtedness for microfinance borrowers through Aadhaar linkages for credit bureaus. As Aadhaar reaches nearly a billion citizens and potentially obtains legislative backing in the near term, the benefits of e-KYC will start to become more tangible.
2. The committee has made recommendations that signal a shift from issuing in-kind subsidies to direct cash transfers. Of note are the moves to phase out the agricultural input subsidy and replace it with an income transfer, and to phase out the agricultural loan interest subvention scheme in favor of a co-pay based universal crop insurance scheme instead. These measures, if accepted will allow better targeting of welfare spends, reduce leakages and level the playing field for market –led service providers.
3. The final theme is that of innovation. Whether it is rethinking subsidy models for small and marginal farmers, suggesting banks offer specialized interest-free windows for demand deposits or creation of a registry and Geographical Information System (GIS) database for agents, multi-disciplinary innovation across policy, product design and technology will be needed to usher in large-scale change. The table captures specific recommendations that we see as innovation-friendly.
In addition, in an effort to boost innovation in the area of payment systems, the Reserve Bank of India (RBI) announced the “Payment System Innovation Awards” in December 2015. It will look for innovations in the following areas:
- Payment security (including fraud prevention)
- Customer convenience and cost reduction
- Mobile payments
- Acceptance/ electronic payment infrastructure
- Use of emerging technologies for payments
The Institute for Development and Research in Banking Technology (IDRBT), the technology arm of the RBI, will organize the competition. A panel consisting of experts will shortlist the most innovative applications, and the top three will be rewarded with citations/prizes. The winners will also be given the opportunity to showcase their concepts to industry representatives. This award signals to industry players the RBI’s commitment to fostering an environment to develop innovative solutions in the delivery of financial services and products.
A first reading of the report on medium term strategies in financial inclusion is very disappointing in my humble views. The reason is that it tries to cover such a vast convass that none of the topics is cogently discussed nor the recommendations properly developed. The composition of the committee is also to be blamed. There is one expert from each field who gets his own thoughts included. Say Dr Gulati a very senior agriculture economist who has well known views agains interest subvention in agriculture loans. He suggests to replace subvention with crop insurance subsidy. The report is enamoured of Aadhaar- the biometric identifier- whose sole purpose is confirming identities. Incorporating it anywhere to avoid duplication is a basic point. Most of the other suggestions like digitisation of land records, creating a GIS map of banking points, sharing of info amongst the CIC companies, are very simple and some of these were already under discussion. Introducing so many disparate suggestions together in a report dilutes the focus from core issues facing financial inclusion. The biggest failure of Indian financial inclusion model has been non existence / non functioning of banking agents and non/ under reimbursement by the governments of costs incurred by banks in providing cash transfers. Unless these basic issues are corrected, rest all will remain a tall talk.
(ex General Manager, Financial Inclusion, Punjab National Bank , India)
Completely agree with you Sir. In my opinion BC is worst abused model as of now and this must be looked by RBI, Banks, Govt. in its totality. Couple of thoughts which I got after talking to many people working in the domain
1. Remove the exclusivity of BC. BC should be equipped with MicroATM and should be geography specific rather than Bank Specific. Make BC Inter-operable.
2. Make literate SHG women as BC by providing them specific training and relevant equipment
3. Look at remuneration structure for the BC. Rather than increasing the commission percentage, govt should look at how to increase the volume of transactions (DBT, Loans & repayments, regular savings, etc.)
A Strong BC network will ensure that inclusion happens in much faster pace