i nc lu s i ve f i nanc e i nd i a re port 2014
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1980s) to 10 per cent and thus phase it out as it appar-
ently reduced profitability of the banking system. The
government, however, could not accept this recommen-
dation in recognition of the problems faced by small and
marginal farmers and tiny businesses to access credit. The
second committee under Narasimham’s chairmanship—
the Banking Sector Reform Committee—which dealt
with banking sector reforms (1998), while acceding to
government’s position, proposed elimination of interest
subsidy for priority sector loans. The regulator, however,
initiated steps towards interest rate deregulation as sug-
gested by this committee.
Nair Committee Recommendations
The
Report of the Committee to Re-examine the Existing
Classification and Suggest Revised Guidelines
, appointed
by the RBI (Chairman: M.V. Nair; CREC hereafter)
submitted its report in 2012. This committee endorsed
the importance of directed lending until the time the
country achieves ‘the desired level of financial deepening
at all levels of society, in rural as well as urban…’ and
recommended the retention of priority sector (consist-
ing of agriculture, micro and small enterprises, micro
credit, education, housing, off grid energy solutions for
households and exports) lending target at 40 per cent
of adjusted net bank credit. Some of the other recom-
mendations made by the committee which submitted its
report in 2012 that are relevant to financial inclusion are:
•
Considering priority sector loans to individual women
as loans to weaker sections
•
Discontinuation of Differential Interest Scheme
•
Specific sub-targets for small and marginal farmers
(including landless agricultural labourers, tenant farm-
ers, oral lessees and share-croppers) within agriculture
sector and micro enterprises within MSE sector
•
Classification of loans sanctioned to NBFCs to be
further on-lent to specific segments as priority sector
loans (up to 5% ANBC)
•
Piloting of priority sector lending certificates (PSLC)
•
Setting up of Agricultural Credit Risk Guarantee Fund
The report was optimistic that affirmative financial
inclusion will help mainstream the marginalized by
ensuring ‘access’.
Mor Committee Recommendations
The latest set of recommendations with respect to priority
sector came out in 2014 from the Mor Committee. The
strategy for inclusion (more precisely financial deepen-
ing) from the perspective of Mor Committee is creation
of a ‘vibrant risk transfer mechanism’ within the country’s
financial system. In line with this logic, the committee es-
sentially recommends certain fundamental changes in the
scope of priority sector lending. It has suggested the inclu-
sion of a variety of instruments of investments—bonds,
pass-through certificates, guarantees—into the PSL fold,
if they relate to entities that qualify for lending under
priority sector. It also suggested PSl status to investments
made by banks in complementary infrastructure like
warehouses, market yards, silos, godowns and NBFCs in
districts with low financial depth. Such investments that
are risky and illiquid, it is suggested, may use a multiplier
of four.
In order to increase the efficiency of lending and
promote customer discipline, Mor Committee urged for
the replacement of measures like interest subvention and
loan waivers with DBT in bank accounts and linking
them with credit bureaus. According tax-free status to
securitization SPVs, allowing banks to use PSL certificates
to meet priority targets (similar to the suggestion of Nair
Committee, 2012), and freeing of interest rates charged
to customer from the base rate plus stipulation are the
other recommendations made by Mor Committee. (The
detailed recommendations of committee are reproduced
in Appendix 5.1.)
The committee has made a case for Adjusted PSL of 50
per cent of ANBC as against 40 per cent. This is proposed
on the basis of a system of weighting that takes account
of depth of credit at the district and sectoral/sub-sectoral
levels, or relative difficulty in lending or accessing loans.
These recommendations are informed by an assessment
of the committee that the current arrangements of finan-
cial inclusion create inefficiencies and disincentives for
the banks and other players. Effective inclusion happens
only when there is system-wide acceptance of the critical
importance of ‘risk and cost to serve’ considerations and
free markets are created ‘for risk and liquidity transfers’
among multitude of players. Such an environment, it is
argued, would encourage bankers to play a more active
role in inclusion.
