Financial Inclusion in India

Why Financial Inclusion?

Financial inclusion (FI) means delivery of banking services at an affordable cost. Banking services = public good. So availability of banking and payment services to the entire population needs to be given without discrimination. It includes getting cheaper loans, Insurance (life, med, non-life, crop etc), Investment (Equity, MF, Pension plans etc).

Why?

Inculcate habit of saving in poor. Capital formation will get a boost.

Adequate, transparent & cheaper credits/ loans - will raise entrepreneurial spirit in poor people & result in prosperity.

Plug gaps & leaks in public subsidies & welfare progs. A study by McKinsey estimated that Rs. 1 lac crore could be saved each year in terms of manpower/time/ paperwork/ leaks if all govt subsidy/ benefit payments are done via e-payments.

Inequality falls more rapidly in areas that have more developed financial intermediaries = Empowerment.

Economic well being = social harmony. Bring Govt closer to poor people. It'll help inclusive growth efforts, and reduce poverty. No brainwashing by extremist/ Maoist/ Sucessionist elements.


What is being done by RBI/ Govt.

Access to banking network

1. Post office has vast network. They open Savings, RD, FD accounts. Also  Insurance, investments in Mutual funds, Payment & remittance services is being provided.

2. RRBs, cooperative banks, primary agricultural societies established for delivers.

3. Lead bank schemes (1969): RBI assigns a district to a bank which is responsible for promoting banking services and financial literacy there.

4. Business Correspondents (BC) system: Banks extend their services to villagers with help of agents, where opening brick-mortar branch is not profitable.

5. Bhartiya mahila bank setup for women empowerment.

6. White label ATMs: 2/3rd of these ATMs to be opened in semi urban and rural areas.

7. Banks to open at least 25% of their new branches in unbanked rural centres.

8. No Frills accounts for poor people. Later renamed to Basic Savings Bank Deposit Account (BSBDA): with relaxed KYC norms.

Giving Access to Credit (Loans)

Priority sector lending targets to banks.
Microfinance, various schemes for Self-help groups by NABARD
Interest Subvention scheme for farmers.
General Purpose Credit Card (GCC) and Kisan Credit Card (KCC) to help people get loans easily.

Giving More Access to Investment

National Savings certificates
Public Provident Funds
New Pension Scheme (NPS), Swavalamban (for people in unorganised sector).
Rajiv Gandhi equity savings scheme (Investing in equity Market: for First timers, upto 50K).
Inflation indexed bonds

Giving Access to Insurance
1. By Post office: tie-up with LIC & its own - offering various schemes.
2. Rashtriya Swasthya Bima Yojana (for BPL families, biometric smart-card based - cashless insurance for hospitalisation in public as well private hospitals, avail inpatient medical care of up to Rs 30K).

3. Rajiv Gandhi Shilpi Swasthya Bima Yojana: by Union Ministry of Textiles, in association with ICICI Lombard (for Craft persons, total medical cover of Rs.15K, death and permanent/partial disability by accident Rs.1.00 lakh).

4. Aam Aadmi Bima Yojana: for landless agricultural families, those involved in 46 other trades including beedi workers, carpenters, cobblers, fishermen etc. Life cover of Rs. 30K for natural death, Rs. 75K for death due to accidents. Scholarship of Rs 100/- per month for 2 children.


A recent committee by RBI named "Nachiket Mor committee" had outlined an ambitious plan of achieving total Financial inclusion by 1/1/2016. It recommended NBFCs to play major role in FI. But its report are being put on back burner as RBI & Finance ministry are not comfortable with the idea of NBFCs getting status of banks (via Payment banks- to open SB a/c & Wholesale banks - to give loans) without obligation of CRR, SLR.

Banking History | Private banks

Birth of RBI
By early 30s, there were >1200 banks in India! With Great depression of 1930s, Indian banks started to collapse - so British Indian Govt set-up RBI to supervise over banks in 1934.

Post Independence
Target of banks were merchants, upper middle class. They were not aiding Five-year plans of GOI (like cheaper loans to farmers). They were owned by industrialists & their policies were meant for their benefit. Hence GOI started nationalizaling banks.

Nationalisation: 1955 SBI, 1969- 14 banks, 1980 - 6 banks. Now govt majority share holder, GOI can pick board-of-directors, policy of its choice.

=>Now Banks were forced to give loans at very cheap rates, recovery became an issue (no quick legal recource available at that time), RBI kept CRR & SLR high (15, 40 % resp) all this means banks are left with little money to lend. No business expansion leads to decline in exports, in some ways it lead to BOP crises of 1991.

Narsimhan Committee I (by GOI in 1991)

Bank licences: 1st Round (1993):10 licences given, out of which 6 are running successfully viz. ICICI, HDFC, UTI (Axis bank in 2007), IDBI, Indus, DCB. Four banks failed at various stages.


Narsimhan Committee II (1998)
Introduce VRS. Legal reforms in loan Recovery => SARFAESI 2002.
Computerization, Electronic fund transfers (ECS, NEFT, RTGS). Allow more private & foreign players.

New Bank licences 2nd round (2001): Kotak Mahindra, Yes Bank.
New Bank licences 3rd Round (2013-14: Given to 2 out of 25: IDFC, Bandhan.

Pro & Against arguments for New Pvt Banks can be read here.

Few takeaways are:

-> As per census 2011:
Only 67% of Urban households & 54% of rural households are getting banking services.

-> Existing banks not sufficient for 100% financial inclusion.
only one in two Indians have bank account
Only one in seven Indians gets loan from banks (others have to rely on money lenders who charge 36% compound interest rate!)

-> "Inside RBI this is seen as an Experiment. RBI wants local/ niche banks". Bandhan is a micro-finance company based in WB. Giving license to it is RBI's push for Financial Inclusion, where "Lead banks/ mainstream banks" have failed.

Equipped with a licence Bandhan can now raise money from public @ 6-7 % & lend it at 10-15% as against ~20-24% it charges now. Read full ET article here. Now it needs to be seen how a NBFC makes transition to becoming a bank & how successful  it'll be for the rural poor.

GI tag

1) Geographical Indicator tagging: More to be added.

mnemonics for types of taxes

Mnemonics for Taxes

DIRECT TAXES :- "wepro.co.in" 
We : wealth tax
Pro : property tax
Co : corporate tax
In : income tax

INDIRECT TAXES :- "excuse me" 
Ex : excise tax
Cu : custom tax
Se : service tax
M : market tax/vat
E : entertainment tax

Organizational Structure and Designing it

Que.What is "organisational structure". What are steps involved in designing the organisational structure. (RBI Grade B 2009 exam)


Organisations perform their functions to achieve set goals and objectives. Functions of government department’s are defined through their various acts. The structure, management and functions of organisations will differ due to the nature and type of the organisation as well as their respective goals and objectives.

A structure ensures the application of process, management and further creates a framework of order and command through which, the activities of the organisation can be planned, organised, directed and controlled.

Organisation structure (OS) is defined as "The logical arrangement of task and the network of relationships and roles among the various positions established to carry out the activities necessary to achieve the predetermined objectives of business". 

It is the pattern of relationships among various components or parts of the organisation which prescribes the relations among various activities and positions.

Internal Organisation structure constitutes the arteries and veins through which the blood of work flows in the body of Organisation. They are required for smooth functioning of day-to-day activities of organisation and increase their profitability.

Structures are designed as per the organisation's objectives and strategy. An organisation chart illustrates the organisational structure, it shows the way the chain of command works.

OS is arrangement of jobs & groups of jobs within an organisation.

Benefits of Good Organisation Structure (Important topic another question can be framed around it)
The structure of an organisation does not only affect the productivity and efficiency but also the morale and job satisfaction of the staff. According to Drucker, the correct design of the structure determines the organisational performance. Drucker says:

“Good organisation structure does not by itself produce good performance. But a poor organisation structure makes good performance impossible, no matter how good the individual managers may be. To improve organisation structure will therefore always improve performance”.

According to Child, the allocation of responsibilities, the grouping of functions, decision-making, coordination, control and reward, are all fundamental requirements for the continued operation of an organisation and the structure will affect how well these requirements are met.

The objectives of structures are to provide for:
The economic and efficient performance of the organisation;
The monitoring of activities;
Ensure accountability for areas of work performed;
The effective coordination of the various parts of the organisation;
Flexibility to respond to future demands and developments and to adapt to the ever changing external environment


Organisation structures can be broadly classified into the following forms:

Line Organisation Structure: Hierarchy derived from a scalar process. Organisation is quite simple in understanding and implementation. this does not offer scope for specialization. Authority flows downwards and responsibility upwards.

Line and Staff Organisation Structure: Staff personnel generally specialists in their fields advice line managers to perform their duties. Staff personnel have right to recommend, but have no authority.

Functional Organisation: Grouping of activities on the basis of functions required for the achievement of ultimate objectives.

Divisional Organisation Structure: Several fairly self-contained autonomous units were created. Each unit was headed by a manager and is directly accountable to the organisation.


Designing Organizational Structure
There is no best way to organize, the structure must take into account the current & possible future situations. Organizing doesn't imply extreme specialization which leads to work being tedious, uninteresting. For tasks to be specific doesn't mean it should be mechanical and limited. Jobs can be defined to be allow little or no personal leeway or giving widest discretion.

Organizing as a process requires several fundamentals be considered:

1) the structure must reflect objectives and plans of organisation because activities are derived from them.
2) it must reflect authority available to enterprise's management.
3) it must reflect its environment just like premises of plans. A good organisational structure can never remain static, an effective structure depends on situation.
4) grouping of activities and authority relationship must take into account people's limitations and customs. This is not to say structure should be designed around people/staff instead of goals.


Steps in designing structure
1. Establish the objectives of the organization

2. Formulating supporting objectives, policies and plans.

3. Identifying, analyzing, and classifying the activities necessary to accomplish these objectives.

4. Grouping these activities in light of the human and material resources available and the best way, under the circumstances, of using them. Groups could be based on function, area/geography or product or a matrix. Departmentalize the activities under groups. If it were not by departmentalization the limitation on no. of subordinates that can be directly managed would have restricted the size of organisations. Grouping activities and people into departments makes it possible to expand organisations infinitely, at least in theory.

5. Frame the key persons handling the top management positions. Delegating to the head of each group the authority necessary to perform the activities.

6. Define the way of communication, line of authority and control and responsibilities of designations,

7. Frame the organizational hierarchy keeping in mind whether decision-making need to be slow and centralized (Tall) or fast and decentralized (Flat)or a mix.

8. Follow up the performance and evaluate them often,

9. Make correction if necessary and update the structure.

The process can be shown by diagram as below:

Credit Information in India

Why India need more CICs & what's their problems?

Credit gives life to economic growth of a country. Credit information cos (CICs) keeps database of financial history of people/firms so that banks/FIs can make informed decision to give loans or credit.

Around 90% of our population has never borrowed from the formal financial system and hence does not have any credit history. Under the circumstances, they are quite likely to be denied credit by the lending institutions. CICs collects data from banks/FIs/ micro FIs themselves.

They came under heavy criticism in 2008 financial crises after CICs and Rating agencies failed to warn of poor asset quality and systemic risks in US. Recently spotlight shifted on CICs after they failed to warn on bank's deteriorating asset quality in India.

4 CICs in India—-Credit Information Bureau (India) Ltd (CIBIL), Experian India, Highmark and Equifax Credit Information Services Private Ltd.

CIBIL established in 2000, started business in 2004.

Why we need CICs?

1) Credit flows to  a sizeable number of individuals/small business owners who do not have a prior credit history, and who have an important role to play in growth of the country.
2) Credit is provided to SME (small and medium enterprises sector which employs large workforce) quicker and at affordable prices.
3) Banks can make informed decision to not only give credit cards, Car loan, Home loan but for commercial loans too. And ensure that these loans are safe. Good lending practices helps in having healthy assets, and minimum NPA (non preforming loans).
4) Alert bankers, supervisiors of risks building up in the system.

At the level of a regulator: provide important inputs for the banking supervisors in monitoring systemic risks. A further use at a regulatory level may be to analyze appropriate capital and provisioning strategies for banks and, in particular, to assess whether current capital and provisioning regulations match up to actual risks.


Issues with RBI.

a) Quality of Data: Data furnished by banks to CICs (credit informatio cos) is incomplete/ inaccurate, even Microfinance institutes furnish better quality data about borrowers. Quality checks by CICs now resulting in improving 'hit rate' (event of finding some financial history/ score). US has a hit rate of 85%, India's 75% not bad.


b) Alternate source of data: Sizable no. of Individuals/ Small business owners don't have a financial history, World bank studies suggested inclusion of non-financial payment data like mobile bills, electricity bills for lending decisions. Meaning if someone is paying electricity bills regularly then lenders may take a call that he'll pay his EMIs too. 

c) Customer Grievance Redressal Mechanism: Its a big issue. There have been numerous complaints about the CICs handing out incorrect reports to the consumers who have to then run from pillar to post to get these corrected.

d) to increase competition in the credit information area. FDI limit has also been increased for companies. This is to make these reports cheaper, affordable for all players.

Recent Regulatory / Supervisory Measures
Central Repository of Information on Large Credits(CRILC): Repository of large credit exposure of individuals and Cos having exposure (both fund and non-fund based) of more than Rs. 5 crore. RBI has suggested CICs to collect information of exposure of even less than 5 crore.




 This is a student's attempt to understand speech of Dr. KC Chakrabarty, DG, RBI. 

Indian Debt & Derivatives Markets - Issues

This note is based on presentation by Sh Harun R Khan, DG, RBI. I am just attempting to understand his speech. I don't claim to be an expert on finances, students are advised (I was typing adviced - read the difference here) - you are advised to add if I miss something.

Regulation of Financial Markets
Financial market participants are 'glass half full' people, and regulators as their 'glass half empty' counterparts. Market participants- see opportunity for reward, regulators see exposure to risk.

Recent financial crisis has demonstrated the need for effective regulation, inadequacy of “free market paradigm”. From ‘light touch’ to ‘comprehensive regulation & efficient supervisory framework’


Global initiatives for regulating financial markets besides fiscal and monetary measures are:

Dodd-Frank Act: the largest financial regulation overhaul in US since the 1930s, to prevent repeat of 2008 financial crisis. Sweeping new rules for banks, hedge funds and complex financial transactions called derivatives.

Volcker Rule (part of Dodd-Frank): aims to limit risky behavior within banks. Banks that take retail deposits would not be allowed to engage in proprietary trading that is not directly related to the market making and trading they do for customers. These banks would also be prohibited from owning or sponsoring hedge funds or private equity funds.

Vicker’s commission in UK - biggest reforms to the banking sector.

EMIR (European Market Infrastructure Regulation): purpose - to improve transparency and reduce the risks associated with the derivatives market.



RBI’s approach: three broad principles

1) wider menu of financial products to enable economic agents (producers, consumers) to hedge emergent risks & meet funding requirements
2) introduction of new products should follow a graduated process (think Interest rate derivatives)
3) improved robustness of the market infrastructure for trading, settlement and reporting (think NSEL crises)


-> RBI prefer stability and safety over short term market activity, two main focus – building resilience and increasing liquidity.


Building Resilience of Debt & Derivatives Markets

1) Requirements for registration and reporting: To ensure that safe & financially strong entities have access to the financial system [e.g.  Primary Dealer authorisation; criteria to enter CDS market]. CDS (Credit default swap) is an agreement where the seller of the CDS will compensate the buyer in the event of a loan default or other credit event.

2) To promote transparency [e.g. reporting requirements for G-Sec trades, OTC derivatives].


Requirements for capital and collateral
3) To ensure that strong financial firms are doing business in financial sector- like Basel 3 guidelines for banks.
4) Ensure credit risk in transactions is managed through appropriate collateral – margins for derivatives.


Orderly market rules
5) To protect the integrity of market prices for encouraging wider market participation & providing credible price information for the economic agents (think benchmarks/ gold price rigging). Prices of products needs to be rational - CDS needs to be linked to underlying exposure its taking (CDS agreement should be followed in letter & spirit)

6) FIMMDA code of conduct for Dispute Resolution Mechanism.

7) Limits on IRF positions (interest rate futures)

8) “Suitability and appropriateness requirements for derivatives”


Enhancing Liquidity in Debt & Derivatives Markets

1) Liquidity in government securities market remains low despite regular issuance across yield curve and state-of-the-art infrastructure in place.

2) Actions have been initiated/completed in nearly 70% of the recommendations of the Gandhi Committee (RBI's Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets).

3) Market Making
Allocate specific securities to each PD (Primary dealer) for market making in them and if required, rotate it (recommendation of Gandhi Committee). It may be operationalised by next fiscal.

4) Short selling (basically means sell first, buy later)
RBI increased the short sell limits in a sequential manner; and would take appropriate action keeping in view the needs of market participants and imperatives of financial stability.


In the presentation Sh Harun Khan pointed out recent measures and issues of RBI which I think needs more elaboration, which I'll prepare and post here. The topics are:

Interest Rate Futures
CD/CP
Repo in Corporate Debt
Enhancing Foreign Investment Limits in G-Sec and Corporate Bonds
maintaing credibility of Financial Benchmarks
OTC Derivatives Market Reforms


So we've a lot of work to do.