There is a Microfinance Bill promoting financial inclusion pending in the Parliament. There is also a financial inclusion committee of the RBI currently live, under Dr KC Chakrabarty. So, how appropriate was it for the new RBI Governor to announce another committee on financial inclusion?
Dr Raghuram Rajan made a brilliant speech, when he took over the as the Governor of RBI on September 4th. TV Commentators were comparing his first day at the RBI as akin to a century on debut (in Test cricket). Dr Rajan was indeed impressive in the way he laid out his plan. One of his moves was to request Dr Nachiket Mor to chair a committee on financial inclusion “that will assess every aspect of our approach to financial inclusion to suggest the way forward. In these ways, we will further the development mission of the RBI”.
The committee headed by Dr Nachiket Mor is a committee on financial inclusion, irrespective of whatever it is called. A look at the terms of reference put out on the RBI website clearly suggests that the committee has a mandate to build a vision for the financial inclusion, set design principles for regulation and suggest a monitoring framework, amongst other things. The focus is to be primarily on poor, vulnerable, marginalised, excluded etc and small businesses. While I applaud this effort, I am worried on several counts and these are articulated in a series of articles, beginning with this one.
We first look at whether the Governor’s (and RBI’s) announcement of the new committee on financial inclusion is a case of pre-empting the Parliament. After all, the Micro-Finance Institution (Development and Regulation) Bill (2012) - MFIDRB (2012) – was introduced in the Lok Sabha in 2012 and has been referred by the Speaker to the Parliamentary Standing Committee on Finance (PSCF). The preamble of the bill states: A BILL to provide for development and regulation of the micro finance institutions for the purpose of facilitating access to credit, thrift and other micro finance services to the rural and urban poor and certain disadvantaged sections of the people and promoting financial inclusion through such institutions and for matters connected therewith or incidental thereto.”
The Parliament and the Parliamentary Standing Committee (PSCF) are to fully deliberate and take a comprehensive view on the scope, extent, merits (and demerits) of the various financial inclusion services (credit, thrift, insurance etc) through different delivery channels (including MFIs – which are themselves very broadly defined as per the said Bill) and most importantly, their regulation and supervision. And please note that the Parliament could in fact reject the bill or widen its scope and coverage to even include business correspondents and others; even the definition of micro-finance institutions and micro-finance services are very broad and can be further modified. In short, there is nothing the new RBI committee will cover that the Bill is already set to cover.
The Bill is in the last stage of its journey within the Indian Parliamentary system towards becoming an Act. The Governor, who is accountable to the Indian Parliament and the Indian people, must therefore answer a few key questions:
1. MFIDRB which is pending in the Hon Parliament, is looking towards “promoting financial inclusion” and it concerns matters “connected therewith or incidental thereto”. That being the case, how appropriate was it for the Governor of the RBI to announce a parallel committee on financial inclusion?
2. Given the above, can RBI’s power and functions be used in a manner so as to make legislative power and process redundant? In other words, the issue is whether by the exercise of such power, RBI can be seen to be circumventing a bill - that also deals with the same topic of financial inclusion - that is pending in the Hon Parliament?
3. It would be important to understand what are the contours of the powers of the RBI as an institution? And more importantly, whether this power vested in the RBI (by virtue of the RBI Act 2 of 1934 and/or other Acts) can be exercised so as to even bypass the legislative power of the Parliament?
4. The RBI’s own role as a regulator and supervisor of NBFC MFIs will most certainly come under close scrutiny by the Parliament and PSCF as part of the MFIDRB (2012) discussions. It must be remembered that Dr YV Reddy, former governor of RBI admitted that the RBI had been blindsided by the way MFIs grew and also admitted to serious regulatory and supervisory failure. Mr Anand Sinha, a serving deputy governor of the RBI has endorsed Dr Reddy’s (above) views in a speech delivered at a FICCI workshop on April 23rd 2012. Here is Dr Y V Reddy, candidly writing in an EPW article - Microfinance Industry in India: Some Thoughts, EPW, vol xlvi no 41, October 8, 2011-EPW article of Dr. YV Reddy on MFIs.pdf - Yimg)
In retrospect, perhaps, the trust that RBI placed in these NBFC-MFIs was misplaced. We in RBI were aware of the fundamental differences between incentives in organisations for for-profit maximisation and others. ...Thus, the most important mistake was in failing to distinguish between the for-profit institutions especially with incentives that accompany listing and trading of the shares, on one hand, and non-profit MfIs on the other. I must admit that, post-retirement, I have realised these mistakes.
That being the case, how could the Governor of the RBI announce the committee on financial inclusion, with specific terms of reference pertaining to regulation and monitoring of such activities?
In other words, is this not tantamount to the RBI wanting to pre-empt the Parliament and distract from its own regulatory and supervisory failures with regard to 2010 AP Micro-Finance crisis that has resulted in thousands of poor people being financially excluded from the formal system? Most of the clients in Andhra Pradesh would now be classified as defaulters in a credit bureau and they have very little access to formal financial services. All of this would not have happened, if only the RBI had been proactive in supervising NBFC MFIs and not let them grow in an irresponsible manner!
5. Most shocking is the fact that there is already a committee on financial inclusion - appointed by the RBI on Oct 11th 2012 - with almost similar terms of reference. This committee is still supposedly live and functioning under the chairmanship of Dr KC Chakrabarty, Deputy Governor! Please see the following link – RBI sets up panel to speed up financial inclusion. What happens to this committee? Why set up a new one? And in whose interest?
Interestingly, Dr Rajan’s introductory note in report of the Committee on Financial Sector Reforms says: “When the Deputy Chairman of the Planning Commission, Shri Montek Singh Ahluwalia, asked me to put together a Committee to write a report on the next generation of financial sector reforms, I was intrigued but also puzzled. Why another report when so many reports had been commissioned in the recent past?”
Also, there have been so many committees in the recent past including the Dr Rangarajan Committee on Financial Inclusion (2008) which clearly laid out a long term vision for financial inclusion. That being the case, what is the urgent need for the financial inclusion committee that was recently announced? I certainly question the wisdom of having one more committee and yet another report that may bite the dust!
These are very critical issues in my opinion and I leave it to the judgement of the Parliament, the Speaker of the Lok Sabha and the Chairman, Parliamentary Standing Committee on Finance to take a final view on these serious questions of constitutional propriety.
(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)
You may also want to read…
RBI’s New Financial Inclusion Committee: Rife with conflicts of interests
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam