Financial sector policy for financial inclusion Renuka Sane - - PowerPoint PPT Presentation

Financial sector policy for financial inclusion

Renuka Sane

National Institute of Public Finance and Policy

July 11, 2017

Telecommunications in India

Stage 1: Setting an objective National Telecom Policy 1994 envisioned universal access and availability. Stage 2: State-driven supply BSNL and MTNL were mandated to achieve at least one payphone per village. Result: Failure. Stage 3: Recognising the need for a market In 1997: Over 2K billion rupees was needed for universal telecommunications access. Stage 4: Market-driven approach Private participation, fair licensing, level playing field, setting up a well-designed regulator etc.

Telecommunications in India

Result

1995 2000 2005 2010 2015 0.01 0.10 1.00 10.00 100.00 Cellular density per 100 (Logarithmic Scale) High Income countries India

Source: World Development Indicators

The curious case of finance

Stage 1: Setting an objective Universal financial inclusion (bank account, basic insurance and some pension). Stage 2: State-driven supply Regulators and policymakers come up with a new product idea, make state-run firms supply it regardless of its viability. Stage 3: Recognising the need for a market There has been little or no effort to focus on the foundations required for a market-based approach. Stage 4: Market-driven approach Policy goal was always to use state-run firms to take finance through the last mile.

What ails viability in finance?

Some thoughts

◮ Licensing requirements: The state actively prefers less

competition in financial service providers.

What ails viability in finance?

Some thoughts

◮ Licensing requirements: The state actively prefers less

competition in financial service providers.

◮ Financial repression: The state actively gathers a large

share of resources, leading to shortage of capital

What ails viability in finance?

Some thoughts

◮ Licensing requirements: The state actively prefers less

competition in financial service providers.

◮ Financial repression: The state actively gathers a large

share of resources, leading to shortage of capital

◮ Failures on consumer protection: The problems of

consumer protection remain unresolved.

What ails viability in finance?

Some thoughts

◮ Licensing requirements: The state actively prefers less

competition in financial service providers.

◮ Financial repression: The state actively gathers a large

share of resources, leading to shortage of capital

◮ Failures on consumer protection: The problems of

consumer protection remain unresolved.

◮ Regulatory uncertainty: The state is not consistent about

policy.

What ails viability in finance?

Some thoughts

◮ Licensing requirements: The state actively prefers less

competition in financial service providers.

◮ Financial repression: The state actively gathers a large

share of resources, leading to shortage of capital

◮ Failures on consumer protection: The problems of

consumer protection remain unresolved.

◮ Regulatory uncertainty: The state is not consistent about

policy. There is little desire to innovate and find solutions to achieve universal financial inclusion.

Licensing requirements

◮ Limited entry

◮ Since 1991, only 14 universal banks have been licensed.

◮ Strict restrictions on the “form” of the financial institution.

◮ Licenses have been granted for 10 small finance banks and

11 payment banks.

◮ Still not sure about how to think about P2P lending. Affects

fund-raising and expansion plans (ET, May 2017)

◮ High capital requirements

◮ NBFC regulations on liquid funds in G-secs, and capital

against poor loans (Roy, 2015).

◮ High proposed minimum paid up capital and net worth

requirements for pre-paid payment instruments (PPIs), which seems disproportionate to the risk (Batra, Shaikh and Zaveri, 2017).

◮ Where is the competition going to come from?

Financial repression

◮ No liquid bond market. Over reliance on banks for capital. ◮ Within banks, high SLR requirements. ◮ Very limited investments by pension funds/insurance funds

into non government securities (Halan, 2014)

◮ Limits on foreign investors (Zaveri and Pandey, 2016) ◮ Example: if MFIs cannot borrow at low cost, they will not

lend further at low cost.

◮ Where is the capital going to come from?

Failures on consumer protection

◮ Numerous examples of mis-selling in Indian retail markets

(Halan, Sane, Thomas, 2014; Halan and Sane, 2017).

◮ Difficult for low cost clean products to compete with high

cost opaque products when customers are not discerning.

◮ Example: The National Pension System. Low cost,

transparent pension product. Has found it difficult to compete.

Regulatory uncertainty

◮ Sudden policy changes that make scale difficult.

◮ Example: Atal Pension Yojana replaced the

NPS-Swavalamban scheme in 2014.

◮ How do you invest in distributing a long term pension

product if policy changes every few years?

◮ Lack of reasoned orders: Orders must state why the state

is taking a particular action.

◮ Example: RBI order refuses Issue of Authorisation to Zoha

Inc, USA to Operate Cross Border Money Transfer Service in India. No reason given for why the company was

• banned. No details on what procedure was followed for this
• rder (Roy, 2011).

◮ Example: Analysis of IRDAI orders shows that reasons for

imposing different penalties for similar offences are not clearly established in the orders (Aggarwal and Behl, 2016)

Way forward

◮ Forcing financial institutions, mostly banks, to do financial

inclusion has meant that banks see inclusion as an

• bligation not an opportunity.

◮ Commercial viability is important. ◮ Think about features of the policy landscape that inhibit

viability

◮ Balance with the need for consumer protection ◮ Build an ecosystem where a thousand flowers bloom.

Thank you.