RBI panel suggests separate banks for low income groups

A committee set up by the Reserve Bank of India (RBI) to go into the issue of financial inclusion and deepening of banking services has recommended the creation of special category lenders to exclusively serve small businesses and low income households.

The committee, headed by RBI deputy governor Nachiket Mor, has suggested providing universal bank accounts to all Indians above the age of 18 years and recommended a vertically differentiated banking system with payments banks for deposits and payments and wholesale banks for credit outreach with relaxed entry point norms of Rs50 crore.

The payment banks would focus on providing payment services and deposit products to its target customers, with a maximum balance of Rs50,000, in order to expand the reach of banks and achieve greater financial inclusion.

The wholesale banks would provide funds to other banks and financial institutions that directly lend to low income households.

On priority sector, the committee has recommended 'Adjusted Priority Sector Lending Target' of 50 per cent against the current requirement of 40 per cent with sectoral and regional weightages based on the level of difficulty in lending.

The committee also recommended risks and liquidity transfers through markets.

In view of the fact that banks may choose to focus their priority sector strategies on different customer segments and asset classes, the committee has recommended that the regulator provide specific guidance on differential provisioning norms at the level of each asset class.

A bank's overall non-performing assets coverage ratio would therefore be a function of its overall portfolio asset mix.

On definition of non-banking finance companies (NBFCs), the committee has recommended only two categories - one for core investment companies and another category for all other NBFCs.

The committee has advocated regulatory convergence between banks and NBFCs based on the principle of neutrality with regard to classification of non-performing assets and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 eligibility.

The committee has suggested the creation of a State Finance Regulatory Commission (SFRC), merging all the existing state government-level regulators like the regulation of NGOs, micro finance institutions and local money services business.

The committee suggested that the RBI should issue regulations on suitability, applicable specifically for individuals and small businesses, to all regulated entities within its purview so that the violation of such regulations would result in penal action for the institution as contemplated under the relevant statutes through a variety of measures, including fines, cease-and-desist orders, and modification and cancellation of licences.

The committee's recommendations come ahead of the issue of new banking licences by the RBI, as part of its efforts to improve the financial reach in a country where 60 per cent of people do not have a bank account and nearly 90 per cent of small businesses have no formal financial access.

The panel was set up by RBI governor Raghuram Rajan soon after he joined office in September.