The Hindu Business Line : Taking ‘a hundred small steps’ to ensure financial inclusion

A host of measures outlined in the draft report would go a long way in ensuring financial inclusions of a significant number of stakeholders in the economy if they are given a try.

G. Srinivasan

New Delhi, April 9 The Committee on Financial Sector Reforms headed by Dr Raghuram Rajan, former Economic Counsellor and Director of Research at International Monetary Fund, has come out with a draft report, highlighting the need to take “a hundred small steps” in the country’s financial sector in place of focusing primarily on a few large and usually politically polemical ones.

As is its wont, the media picked up the boldest of big picture reforms encompassing the steady opening up of investment in the rupee corporate and government bond markets to foreign investors, liberally letting takeovers and mergers of banks, including domestically incorporated subsidiaries of foreign banks and encouraging greater outward investment by provident funds and insurance companies from India when inflows are high.

No doubt, these reforms raise the hackles of the governing coalition and also the rank and file of the legions of bank employees who have been averse to any root and branch reform in the system lest they be exposed.

However, a host of meaningful measures outlined in the draft report would go a long way in ensuring financial inclusions of a significant number of stakeholders in the economy if they are given a try. For instance, the committee avers, credit to small and medium enterprises could be boosted in a big way if the trade receivable claims they have on large firms could be converted to electronic format, accepted by the large firms and sold as commercial paper.

Credit door

The committee hits the nail on the head when it states that the most important shift today will be to alter the accent somewhat from the large-bank-led, public-sector dominated, mandate-ridden, branch-expansion-focused strategy for financial inclusion and broadening the access to finance to legions of people across the country.

Again, it aptly argues that if the enormous transfers to the poor through various government programmes could be channelled into savings accounts that the poor open, not only will leakage be pruned, but the poor will be able to build savings histories with their banks which can then open the door to credit. In a pragmatic way, it quips that “instead of forcing credit to household that could thereby become heavily indebted, the focus should be on making them creditworthy so that when opportunities arise, they have access”.

Co-op bank structure

On the much-maligned cooperative banks which had to be repeatedly bailed out on political cues, the committee calls for “rethinking the entire co-operative bank structure and moving more to the model practised elsewhere in the world, where members have their funds at stake and exercise control, debtors do not have disproportionate power and Government refinance gives way to refinancing by the market”.

Even as it endorses the Vaidhyanathan Committee recommendations on governance reforms and implementation without any dilution, it further plumps for a strong, prompt corrective action regime so that unviable cooperatives are closed. It also suggests that well-run cooperatives with a good track record explore conversion to a small bank licence with members becoming shareholders.

Warehouse receipts

For poor peasants, the committee latches its hope on the likely enactment of the Warehousing (Development and Regulation) Act this year under which warehouse receipts would become a negotiable instrument, emerging as a new, reliable form of collateral in the agricultural sector, where there was no other security save land.

The advent of the warehouse receipt systems would result in a lower cost of financing and an increase in liquidity for agriculture. This would be a break from the focus of the last few decades on targeted lending as a way to energise farm credit. Besides, the Act goads scientific warehousing of goods, improved supply chains, enhances rewards for grading and quality and encourages better price risk management. Assuming that at any time, about 15-20 per cent of the annual agricultural produce is stored in silos, the Act has the potential to inject over $30 billion of farm credit!

Other significant recommendations of the committee include making land rights clear as one of the most pressing needs of the country, re-examining restrictions on tenancy so that tenancy could be formalised in contracts, which could then be the basis for borrowing and expediting the ongoing efforts to improve land registration and titling—including full cadastral mapping of land, reconciling various registries, forcing compulsory registration of all land transactions, computerising land records and provide easy remote access to land records.

In fine, the draft report is a deft exercise in gauging the public perceptions about what changes the country must embrace on a fast track if it is serious about being in the makeover mode from an emerging economy right now into a fully developed one by 2020, while pricing risks properly against market mayhem and turbulence.

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