i nc lu s i ve f i nanc i ng
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formal sector’, provide better safety to customers and de-
risk the inclusion strategy of banks’ (Aggarwal, 2014).
It opens up for non-banks including MFIs substantial
opportunity to deal in payments and remittances and
experiment with multiple revenue streams that help them
improve long-term profitability. Rajiv Lall, the Executive
Chairman of IFDC thinks: ‘The idea of differentiated
licenses is very appealing…we need to find some way
of creating or bridging the regulatory continuum from
NBFCs to a bank. Today the difference between two is
too stark.’
8
While applauding the committee for a rich and detailed
analysis of financial inclusion, some of the commentators
think that the proposals are too ambitious to be practical.
For instance, the proposal for universalisation of bank
accounts by 1 January 2016 with the Aadhaar as the
basis of authentication is seen as an unreal goal given the
technical constraints and legal barriers
9
associated with it
(Narasimhan, 2014; Rajshekhar and Sivaramakrishnan,
2014). Setting artificial deadline for full inclusion, it is
argued, is fraught with systemic risk, apart from being
unrealistic.
5.3.1 Small Banks and Payment Banks:
RBI Guidelines
The recommendations substantively informed the vision
of the central bank for initiating the movement towards
a differentiated banking structure. They formed the basis
for a set of guidelines issued in July 2014 for setting up
two new classes of banks: payments banks and small
banks.
The primary objective of both small and payments
banks as described in the draft guidelines is to further
financial inclusion by providing savings vehicles to the
underserved and unserved sections of the population. The
other objective for the small banks is to ensure supply of
credit to small business units, small farmers, micro and
small industries, and other unorganized sector entities.
As for the payments banks, provision of payments/
remittance services to migrant labour workforce, low-
income households, small businesses, other unorganized
sector entities and others forms the second objective.
They will be required to use the word ‘payments’ in their
names as a mark of differentiation from other banks.
Both small and payments banks are expected to develop
operational models that are high on technology and low
on costs.
10
It is clarified that the key criteria for licensing Small
Banks—preferably promoted by professionals from
banking/financial sector, NBFCs and MFIs—would be
local focus and the ability to serve smaller customers.
They should primarily undertake basic banking activities
of acceptance of deposits and lending to the designated
set of clientele. However, with the prior approval of
the RBI they can also undertake other simple financial
services activities.
The guidelines for small and payments banks were
discussed in many fora since they were announced by the
central bank. As expected, depending on the interests of
the participants the consultations too have come out with
different responses (Box 5.3). For instance, the Round
Table on Payments Banks organized by the Poorest States
Inclusive Growth (PSIG) Programme with PPIs, telecom
companies and BC companies agreed that the guidelines
provide the scope for non-banking establishments like
them to enter the banking space. They however recom-
mended several changes as follows to make the room
larger for them play the game more viably. For instance
the contiguous districts criterion is resented by large
NBFCs, MFIs and others, as most of them have ‘an all
India footprint’ (Saha, 2014).
5.4 MICROFINANCE AND THE
INCLUSION DEBATE
We briefly discussed in the beginning of the chapter the
recommendations made by the Rangarajan Committee
(2008) towards strengthening the role of the microfi-
nance sector in the process of financial inclusion. The
recommendations pertained to both SHGs and MFIs.
Regarding SHGs, the Committee recommended the
following:
•
Upscaling of SBLP.
•
Pomotion of SHGs in regions with high levels of
exclusion by developing models suited to their local
contexts.
•
Incentivising NGOs to diversify into backward areas
for promoting SHGs.
•
Encouraging voluntary federations of SHGs, with no
role in financial intermediation.
