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Top 5 Game changers for the Indian Financial System in 2015

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In our final post of the year we put together the Top-5 game changers of 2015. While the previous year saw licensing of two applicants to set-up full-service banks in India after a period of more than a decade, 2015 saw RBI announcing in-principle Payments Bank licenses for eleven applicants and Small Finance Bank licenses for ten applicants. The licensing of Payments Banks especially, with successful applicants comprising diverse players from the industry, marks a very important milestone in India’s banking history and presents a great opportunity for the country’s financial landscape.

The continued adoption of Aadhaar, which is likely to cover a billion citizens by March 2016, alongside the increased penetration of mobile & internet services and mushrooming of many fintech players in the start-up scene, provides much to be excited about in the coming year.

Here are our Top 5 choices from 2015:

Licensing of 11 Payments Banks by the Reserve Bank of India

The licensing of Payments Banks represents the first round of licensing for a differentiated banking design following on RBI’s Discussion Paper on Differentiated Banking and the recommendations of the RBI Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households.

The successful applicants include the largest telcos, corporate houses, business correspondents, a depository, the postal services and a mobile wallet provider. The number of licenses and the diversity of the pool bode well for the scale and scope of what will be pursued by this new category of banks in the years to come.

RBI grants “In-principle” Approval to 10 Applicants for Small Finance Banks 

From amongst a pool of 72 applicants, RBI in September 2015, granted in-principle approval to 10 applicants to set-up Small Finance Banks. Eight out of these 10 entities are micro-finance institutions (MFIs).

The Small Finance Banks will offer basic payments services, accept deposits, and unlike Payments Banks, they can also lend. However 75% of their lending has to be to towards priority sectors as stipulated by the RBI and at least 50% of its loans should constitute loans and advances of up to 25 lakh.

Insolvency and Bankruptcy Bill, proposed by the Bankruptcy Law Reforms Committee

In order to improve the ease of doing business in the country, the Ministry of Finance had constituted a Bankruptcy Law Reform Committee to look into various bankruptcy related issues. The committee had submitted its report in November 2015, on the basis of which the Government introduced the “Insolvency and Bankruptcy Code, 2015” bill in the Parliament that provides for resolution of insolvency in a speedier and time-bound manner.

The law drafted by the BLRC is a consolidated bankruptcy framework, covering both individuals as well as legal entities, and aims to be a holistic reform of the insolvency resolution process for all entrepreneurs and lenders in India. The reforms aim to improve the time taken to resolving insolvency and improve loss given default on bad loans.

Continuation of the Direct Benefit Transfer scheme via Aadhaar

The impetus on enabling Direct Benefit Transfer (DBT) for subsidies through Aadhaar/linked bank account has resulted in improved efficiencies and significant savings for the Government.[1][2] Under DBT for LPG, or Pahal Scheme, so far 147 million beneficiaries have received close to Rs.30,000 crore in their bank accounts. According to the chief economic advisor, Arvind Subramanian, sales of subsidized LPG cylinders under the DBT scheme have come down by about 25 per cent as most ‘ghost beneficiaries’ have been eliminated through such direct linkage and he estimates that in 2014-15, savings could be as much Rs 12,700 crore.

The Government is likely, in the coming year, to rollout the DBT programme in the Public Distribution System at a large scale

Universal reporting to credit bureaus

In January 2015 RBI directed all Credit institutions[3] (currently circular is directed to scheduled commercial banks) to become members of all Credit Information Companies (currently four in number – CIBIL, Equifax, Experian, High Mark), submit data including historical data to them, and to update them regularly atleast on a monthly basis. This directive is likely to lead to uniform and standardized credit information that institutions can use in making better credit decisions.

We would like to wish our readers a very happy and peaceful new year and look forward to your continued readership in the coming year. You can follow us via Twitter or subscribe to receive email updates from our blog by signing up here.

Once again, Happy New Year!

[1] Barnwal (2015) Curbing leakage in public programs with biometric identification systems: Evidence from India’s fuel subsidies
[2] Muralidharan et al (2014) Building state capacity: Evidence from biometric smart cards in India
[3] Defined under the CIC Act 2005 to include banks, NBFCs, public financial institutions, SFCs, and HFCs, among others.

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