RBI’s New Financial Inclusion Committee: Bypassing the Parliament?

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.)

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RBI’s New Financial Inclusion Committee: Rife with conflicts of interests

Comments
Ramesh S Arunachalam
8 years ago
Please see the next article on the FI committee - http://www.moneylife.in/article/rbis-new...
sathyacumaran
8 years ago
sathyacumaran

All this is okay Shri Raghu Ram Rajan wants to set right our financial postion right but how far the suboridnates going to cooperate with him is million dollar question because for every rule to control the hoarder and blackmarketers and hawala trader there is an RBI officials behind it and as such they give the loop holes for which they have been rewarded our earnest and sincere advise to Shri RBI Governor better tighten the belts of RBI then everything would move correctly and inflation would also be under control is our only suggesstion
Anil Agashe
8 years ago
I am a little puzzled why RBI cannot have its own committee looking at this. Surely this committee has more learned people in the field than the Parliamentary committee that will be briefed by babus.
Any recommendations/observations of RBI committee can then be considered by the parliament while passing the bill.
Why the suggestion that RBI is over stepping its mandate? Finally the law will be passed by the parliament only.
M T Chiddarwar
Replied to Anil Agashe comment 8 years ago
I entirely agree with the view expressed by Mr. Anil Agashe. A committee of Parliament is fillede only with politicians and include idiots like Lalu etc in the commttee. A committee of non political professionals can be trusted more. Going by the way congress is going, all committees willl soon have criminals like Lalu and Masood, who have destroyed the country. RBI Governor is RIGHT.
Ramesh S Arunachalam
Replied to Anil Agashe comment 8 years ago
There is a conflict of interest. RBI is responsible for the manner in which financial inclusion (including micro-finance) has unfolded in the last few years since its policy push in 2005.

As part of the MFIDRB (2012) in the Parliament, RBI's own role as a regulator and supervisor (of financial inclusion) will also come under scrutiny. That being the case, the RBI cannot distract by forming a new committee and absolving itself of all the blame. For much of what has happened in financial inclusion since 2005, RBI is responsible, at least in part.

Second, With all due respect, tell me how many committees does RBI want on financial inclusion. There is already one committee which is live under Dr K C Chakrabarthy. What is the rationale for a 2nd commitee now. Please wait to see my analysis of the committee in terms of composition, conflicts of interest and other aspects. I am also writing another article which looks at several committees in the last few years on the same or similar topic and reports gathering dust. And what wasteful expenditure when committees are duplicated! Please file an RTI on what expenditure has gone into these committees and what the impact has been. You will understand what I am saying. Thanks for your comments anyway!
Vinod Kothari
8 years ago
Financial inclusion is often thought of as synonymous with microfinance, but that is not correct. Financial inclusion has a much larger fabric. Medium, small, marginal borrowers of all kinds, in general, designing a financial system that ensures inclusivity for both business and personal borrowers - this is far wider than microfinance.
Ramesh S Arunachalam
Replied to Vinod Kothari comment 8 years ago
Agreed Vinod but The broad subject matter of the MFIDRB (2012) concerns financial inclusion and the Hon Parliament and the Hon 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. So, please do not view the MFIDRB as a micro-finance bill. Its scope is very broad and the preamble talks clearly about financial inclusion

 
In fact the preamble of the bill (62 of 2012), as introduced in the Hon Parliament, states the following:

“THE MICRO FINANCE INSTITUTIONS (DEVELOPMENT AND REGULATION) BILL, 2012

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.” (Source: The Micro Finance Institutions (Development and Regulation) Bill, 2012, http://www.prsindia.org/billtrack/the-mi...

And please note that the Hon Parliament (based on the recommendations of the Hon PSCF) could in fact reject the bill or widen its scope and coverage to even include business correspondents and others. The significant point here is that even the definition of micro-finance institutions as per the bill is very broad and can be further modified and I quote from the bill (page no.5):

“(i) “micro finance institution” means,—
(A) a society registered under the Societies Registration Act, 1860; or
(B) a company registered under section 3 of the Companies Act, 1956; or
(C) a trust established under any law for the time being in force; or
(D) a body corporate; or
(E) any other organisation, as may be specified”

Please note point E, which says that any other organisation could be specified as an MFI. And the Hon parliament or Hon PSCF may change this focus entirely to include an even larger set of institutions, if they think so in their collective wisdom.

Likewise, the scope of micro-finance services can be further broadened or changed significantly from its present definition (page no.5):

“(j) "micro finance services" means any one or more of the following financial
services provided by any micro finance institution, namely:
(A) micro credit facilities involving such amount, not exceeding in aggregate five lakh rupees for each individual and for such special purposes, as may be specified by the Reserve Bank from time to time, such higher amount, not exceeding ten lakh rupees, as may be prescribed;
(B) collection of thrift;
(C) pension or insurance services;
(D) remittance of funds to individuals within India subject to prior approval
of the Reserve Bank and such other terms and conditions, as may be specified
(E) any other such services, as may be specified, in such manner, as may be prescribed;”

Again, please note point E, which proposes that any other services may be specified. And the Hon parliament or Hon PSCF may change this focus entirely to include an even larger set of services, if they feel so in their collective wisdom.

Similarly, the bill talks of the need for promoting inclusion for rural and urban poor and certain disadvantaged sections of the people – the scope again is very broad and can be made to encompass various sections of society, as the Hon Parliament and Hon Parliamentary Standing Committee for Finance deem fit.

Therefore, the larger point is that the Parliament is the forum take the debate and deliberations to and as citizens we will get an opportunity to represent our case to the standing committee. And given that RBI's own role as a regulator and supervisor would be under scrutiny, in my humble opinion, RBI should not have appointed this committee. Please look at some of the PIL's filed in the Hon Supreme Court (especially related to UID) and there the Central Govt's powers to bypass the Parliament have been questioned. That being the case, the RBI cannot be an exception

Ramesh S Arunachalam
Replied to Ramesh S Arunachalam comment 8 years ago
Let me give you another example Vinod. See what Mr Anand Sinha says in his speech at FICCI on April 23rd 2012 and I quote:

"At a time when financial inclusion is at the center stage of the regulatory landscape, the last mile connectivity provided by the MFIs has to be leveraged upon, to include the hitherto financially excluded. Although the MFIs are facing tough times, there is a fair degree of opportunity to build long-term sustainable business around microfinance. Balancing the interests of the vulnerable borrowers as also the microfinance institutions; effective regulations, well calibrated transition time and some breathing space to the institutions could help the microfinance sector to turn around, expand and help achieve inclusive growth.”

Even he sees MFIs as an important last mile for financial inclusion

In fact, I hold the RBI as being responsible for the mess in this area. They let NBFC MFIs grow irresponsibly (without any norms for Governance etc - the connected lending circular of May 2007 was in abeyance even in 2010 July)

The top 6 AP MFIs added over 2 Billion US $ in GLP in 2 years (24 months), which is equivalent to each NBFC MFI adding almost Rs 78 crores every month. I have RBI supervison documents which say that the Department of Non-Bank Supervision (DNBS) must closely supervise(both on-site and off-site supervision) all NBFCs with a portfolio of Rs 100 crores. What were they doing when each of these NBFC MFIs were added 78% of that threshold value month on month for 24 months during the period, April 2008 - March 2010. That is not all

The RBI did not permit NBFC MFIs to act as business correspondents. Why?

All of these issues and many more will have to be debated and deliberated at the Hon PSCF. That is why, given that the MFIDRB is now in parliament, having a new committee on financial inclusion is not appropriate. Also, what happens to the financial inclusion committee headed by Dr K C Chakravarthy, that I referred to in my article. RBI needs to explain!
Santanu Sengupta
Replied to Ramesh S Arunachalam comment 8 years ago
Dear Ramesh
I want you to be a speaker in our conference FIPS Delhi 2013.We all want cross pollination of ideas.Yours has been a fresh air. I ma refraining from commenting at the moment. Please connect it me at [email protected]
Regards
Santanu
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