On the ‘Implementability’ of the Recommendations of the RBI Committee on Comprehensive Financial Services

Since its release on January 7, it has been heartening to see the amount of debate and interest generated by the Report of the Committee on Comprehensive Financial Services, chaired by Dr. Nachiket Mor. One strand of commentary has been on the ambitious goals laid out by the committee and the nature of implementation challenges. Given that the membership of the Committee was by and large “suppliers”, it had the good fortune of receiving a lot of practical wisdom on these issues. This post attempts to share some of that thinking.

Three elements are important to keep in mind while thinking of implementability of the Committee’s recommendations:

1. the unprecedented success of Aadhaar in covering nearly half the country’s population, a target that the banking sector has not been able to achieve in decades of its existence
2. the impressive gains made by the twenty-seven Pre-Paid Instrument (PPI) providers (who are not banks) licensed over the last three years in the domain of low-value money transfers using the distribution network of retailers and mobile phone rechargers and the Immediate Payments System (IMPS) platform and finally,
3. the RBI’s indication of its willingness to provide licenses to differentiated banks in its Discussion Paper.

Let’s start with the historic opportunity presented by the large number of Aadhaar issuances. The single biggest barrier to opening bank accounts is establishing identity of the individual by the bank. Once the identity is established, opening a bank account is nothing but a database entry for the bank. Think of it like opening a gmail account. It involves little to no cost to the bank. The Committee felt that with some coordination between UIDAI and banks, the Aadhaar issuance process could be leveraged for bank account opening as well. The methodology suggested is as follows: a) an instruction to open the bank account should be initiated by UIDAI upon the issuance of an Aadhaar number to an individual over the age of 18 b) the bank would need to be designated by the customer from amongst the list of banks that have indicated to UIDAI that they would be willing to open such an account with the understanding that it would attract no account opening fee but that the bank would be free to charge for all transactions, including balance enquiry with the understanding that such transactions‘ charges would provide the host banks with adequate compensation c) the Bank would be required to send the customer a letter communicating details of the account thus opened.

The Committee’s recommendation that the RBI license “Payments Banks” has also received much attention. Several people have interpreted this to be a new idea but the fact is that today we have twenty seven Pre-Paid Instrument issuers (PPIs) such as Airtel Money and Oxigen that are not banks, who are accepting deposits and enabling account transfers. They carry out a diluted form of KYC check and maintain their account balances in escrow with a bank. For all practical purposes, they are a bank today. One growing demand from these institutions and their clients has been to enable withdrawal of these balances at a retailer point rather than at a bank branch or a business correspondent location. The Committee looked at these developments and felt that a more robust way to provide these services would be to give these PPIs full deposit and withdrawal functionality and make them safer by having them directly overseen by RBI rather than through a bank. Even if 50% of PPIs choose to become Payments Banks and scale up their money transfer services, that would have a significant impact on inclusion on that front over the next 2-3 years. The ability to carry out transactions in remote corners of the country will be enabled by the near universal coverage of mobile and broadband networks. It will provide much-needed competition and innovation to enable consumers to cheaply send and receive money to each other, an area where countries like Kenya have left India very far behind. At the same time, customer deposits will be safe because they would be overseen by the Regulator.

The third implementation enabler comes from the new direction envisaged by RBI of differentiated banks and continuous licensing. The thought process here is that rather than create several more full-service banks that are “clones of each other”, there may be value in enabling specialisation and plurality of strategies among banks. The Committee took this thought process forward in its recommendation to create Wholesale Banks for the purpose of increasing credit deepening to specialised segments such as SMEs and low-income households, a task that has been very hard for existing full-service banks to achieve. The proposal is to take interested high quality NBFCS (including MFI-NBFCs), that are already engaged in financial inclusion and priority sector lending activities but are stymied by dual regulation from state governments and the RBI, and transition them into functionally specialized wholesale consumer and investment banks. These are not envisaged to take retail deposits but will borrow from other banks and capital markets. These wholesale banks will be able to deliver on financial inclusion goals immediately without putting retail depositors at risk and the strong performers in this group could be good candidates for full-service banks in the future.

These three levers: Aadhaar-linked bank accounts, PPIs progressing into Payments Banks and NBFCs progressing into Wholesale Banks are crucial to the thought process of the Committee on how the Report’s recommendations may be implemented.