Does Nachiket Mor Committee report impress to deceive?

One of the first initiatives that the new RBI Governor Mr Raghuram Rajan took after assuming office a few months back was the formation of the Nachiket Mor committee on “Comprehensive Financial Services for Small Businesses and Low Income Households”.

Now the committee which was set up only in September 2013 has submitted its report at the same speed with which Raghuram Rajan displayed on the licensing of new banks. RBI released a copy of the report on january 7th for public comments. The Comments may be emailed or sent by post to the Principal Chief General Manager, Rural Planning and Credit Department, Reserve Bank of India, Central Office, 10th floor, Shahid Bhagat Singh Marg, Mumbai 400 001 on or before January 24, 2014.

The committee has made several radical recommendations and while laying down its vision statement for financial inclusion and deepening, has suggested providing a universal bank account to all Indians above the age of eighteen years and has recommended a Vertically Differentiated Banking System with Payments Banks for Deposits & Payments and Wholesale Banks for credit outreach with relaxed entry point norms of ` 50 crore.

On priority sector, the Committee has recommended Adjusted Priority Sector Lending Target of 50 per cent against the current requirement of 40 per cent with sectoral and regional weightages based on the level of difficulty in lending. The Committee has also recommended risks and liquidity transfers through markets.

The Committee has advocated regulatory convergence between banks and NBFCs based on the principle of neutrality with regard to classification of non-performing assets and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 eligibility.

The Committee has suggested that a State Finance Regulatory Commission (SFRC) be created into which all the existing State Government-level regulators could be merged and functions like the regulation of Non-Government Organisations-Micro Finance Institutions and local Money Services Business could be added on.

The Committee has desired that the Reserve Bank should issue regulations on suitability, applicable specifically for individuals and small businesses, to all regulated entities within its purview so that the violation of such regulations would result in penal action for the institution as contemplated under the relevant statutes through a variety of measures, including fines, cease-and-desist orders, and modification and cancellation of licences.

The recommendations are radical and will have significant impact on the Banking and Financial sector in India and will also significantly affect the stock markets. It will also affect the proposed new Banking licensee aspirants.

In view of the nature of some of the recommendations that may also affect security of public money, it is essential for experts in the field to study the report and submit their comments to RBI in time.

Mr M.S.Sriram, a former professor of IIM Ahmedabad opines has published an interesting article titled “Why the Nachiket Mor committee report on financial inclusion disappoints” in which makes a good reading to begin your exploration of the report.


Copy of the report is available here.: 

Additional comments of two of the members can be found here:


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Abolition of Personal Income Tax

A discussion has now ensued in India about the possibility of personal income tax being completely abolished if BJP comes to power. This proposal though is in the initial stage of discussion and yet to be adopted into the manifesto of the party for the forthcoming Loksabha elections, has already evoked lot of interest both from the economists and politicians.

There is no doubt that the proposal will be received well in those markets where AAP is gaining strength and hence it is a good political policy. However what is also required is to discuss the proposal from the point of view of it’s economic impact.

The undersigned welcomes the move for its revolutionary potential to reform the tax regime in the country. At the same time it is felt that some collateral measures would help in making the proposal work to long term benefits to the economy.

A good perspective on the subject is found in First post which is worth reading.

It is estimated that the current revenue from direct taxes in India is of the order of Rs 250000/- crores.  If therefore the proposal has to be given a serious concern, there has to be counter measures to offset this revenue loss.

It is also expected that if the proposal is introduced,  there will be an increase in the inflow of funds from professionals and businessmen to the Banking sector. (It is expected that the abolition of IT would presently be in the non corporate sector).

It is stated that 99% of the tax payers contribute insignificant amounts to the revenue kitty. It is only the top 4 lakh persons who contribute to the revenue in a significant manner.  Hence the abolition if it comes through will provide relief to early 4 crore voters in India who need not file IT returns. The current regime of Mr PC is obsessed with expanding the tax base and hence has built up a large number of irrelevant tax assessees. These are also the persons who feel harassed when IT officials raise needless queries on trivial transactions. The enormous saving in manpower arising out of leaving the 4 crore assessees from the tax bracket would add to the productivity of the economy.

One suggestion that is being discussed to offset the loss of revenue is an “Expenditure Tax” where a Bank customer would be taxed on the amount of “Net withdrawals from the Banking system”. However such a proposal would be counter productive since it will bring back the problems to the assesses in a different manner. It is therefore better if no such expenditure tax is considered. However there would be some increase in the demand for manufactured goods and an increased inflow in the indirect taxes.

In such a scenario, there would be a need for placing some incentives for public not to spend indiscriminately and adding to inflation. It would therefore be essential to encourage public to retain funds in the Banking system itself. An interest rate regime based on the volume of deposits can encourage increased savings accumulation in the Banks and avoidance of an incentive to have multiple bank accounts and carrying of benami accounts. What this means is that interest rate surcharge is paid to the depositors on the basis of deposit slabs. Eg: Deposits over Rs 1 lakh  will have an incrementa interest of 0.25% over and above the rate otherwise payable. Similarly deposits abo r Rs 5 lakhs can be paid a higher interest of o.5% etc.

At the same time, Banks need to invest the increased funds in a productive manner. For this purpose it would be advisable that the Government/RBI initiates some action on channelising Bank funds to the manufacturing sector by incentivising lending for Capital Expenditure on a long term basis. In other words, term loans for 5+ years to the manufacturing sector need to be encouraged. This can be done by providing some SLR/CLR exemptions based on long term lending to manufacturing sector.

Such a move would also provide a push to the stock markets particularly to the manufacturing sector besides banks.

In summary, abolition of Income Tax is exciting. At the same time some changes in the Banking sector would make it even more exciting.

I wish the think tank of BJP considers such additional proposals for Banking sector reform along with the proposal for abolishing the income tax.



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Electronic Frauds in Banks.. New guidelines to benefit Customers

The year 2014 has started with some good news for Bank fraud vicitms. According to today’s Economic Times, it is stated that the new code released by the Banking Codes and Standards Board of India (BCSBI) states that

“Customers will have to be compensated for electronic frauds unless the bank can prove the fraud occurred due to negligence on part of the client”

See the Article

This is to be considered as a positive development for the reason that this narrows down the defense of the bank in avoiding the liability through litigation.

Further this may reopen the opportunity for customers to approach the Banking Ombudsman since non compliance of the BCSBI code could be a cause of action for the Ombudsman to intervene. Earlier the Banking Ombudsman was reluctant to take up the complaints on the ground that it involved a Cyber Crime and required evaluation of complicated digital evidence.

According to BCSBI, “The revised code says that if the customer incurs any direct loss due to a security breach of the Internet banking system that is not contributed or caused by the customer, the bank will bear the loss, unless it is able to establish that the customer is guilty.” 

The revised code which will be effective from January 2014   also  says banks will be responsible for any acts of omission and commission committed by business correspondents.

Naavi has been personally fighting for such mandate for several years now and Banks such as ICICI Bank and Axis Bank have been frustrating his efforts through litigation. These guidelines therefore come as a big relief.


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More Credit Card frauds in store

Recently a fraud of Rs 63 lakhs involving  gross negligence by Bank employees not ruling out their involvement. It is said that the Bank believed that the customer had a sore throat and executed large transactions including closing of FDs and remitting the amount to other accounts based on e-mail requests which were obviously not digitally signed.

See report

This incident indicated how current day Bankers have no idea of their responsibilities to the customers. It is as if a bunch of data entry operators have been designated as “Bankers” not withstanding some of them having MBA qualifications. They think that the entire banking is just punching some keys on the computer. For those of us who have undergone a rigorous training in Banking both on procedures and law, the current situation is completely unacceptable. This is not merely negligence but “Recklessness” for which they alone should be held liable.

Close on the heels of this Banker’s negligence comes a report about how many credit card/debit card accepting merchant establishments are reacting to the latest RBI guidelines that all POS systems should be able to accept the Pin entry for authenticating card payments. Many Banks have made ATM PINs also PINs for debit cards and hence the customers are using one single PIN with which they can pay with debit cards as well as withdraw money from ATMs.

Now it is reported that  many establishments are continuing to keep the POS in the cashier’s counters and asking customers to write the PIN on the back of the bill so that the card entry can be completed by the cashier without the customer needing to move to the counter. Some are asking the PIN orally so that the cashier can enter the PIN in the POS kept some where not easily reachable by the customer.

Any ordinary person should realize that if PINs are being revealed to everyone then any fraudster can easily clone the card, use the PIN and empty the Bank accounts within minutes.

It is clear from the report which comes from Pune but may be happening elsewhere that merchant establishments are expressing their ignorance on the risks. If this is not corrected immediately, we will be seeing that hundreds of card frauds would be happening in the coming days.

Merchant establishments which want to serve their customers at their table have to use WIFI enabled POS systems. Otherwise customers have to be called to the counter and provided with facility to confidentially enter the PIN. If this does not happen, then customers have to be indemnified by the Banks and the Merchant establishments.


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Tata Sons withdraws Application for Banking license

In a decision that looks surprising to many, Tatasons has withdrawn its application for Banking license.

Refer story

This is the second group after Videocon to have withdrawn its application.

It would be interesting to observe the impact of the decision of Tatasons on other applicants.


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The threat of Bitcoins…Attention RBI

An article in Forbes raises an interesting aspect on how China may be preparing for a new Cyber War front based on controlling the virtual currency.

See the article here

Readers of are familiar with the discussions on “Linden” the virtual currency used on and how there was a dispute about conversion of the Lindens into US dollars by a person alleged to have fraudulently sold virtual land in This happnned several years ago but was an indication of how disputes may arise if Virtual world starts interfering with the physical world in the currency domain.

Now every cyber fraudster has to still collect physical currency through a Bank to enjoy the fruits of his fraud. But if Virtual currencies gain wide acceptance then fraudsters can easily encash their fraud proceeds through the virtual currency by passing the regulatory system of the physical world. This will have very serious adverse consequences on the society.

Now an indication of what is likely to happen has been indicated by the increasing popularity of “Bitcoin”, a peer to peer digital currency that functions without he inter mediation of a central authority. The system is a currency version of Bit Torrent.

Bitcoin is termed as a “Cryptocurrency” since it uses crryptography to control transactions and prevent duplication. The system works through operators known as “Miners” who process the generation of coins.  Every individual transaction is permanently recorded in a public ledger known as the block chain.

Users keep “Wallets” in which bitcoins are stored. Payment gateways assist in transfering payments from one bitcoin wallet to another.

The Bitcoin system originally introduced in 2008 as a concept paper became operational in 2009. In 2011 it is reported that Bitcoin exchange value rose from $0.30 to $32 before falling back to $2.

This year, China appears to be showing increased attention on the system and the China based Bitcoin exchange BTC China is said to have overtaken the Japan based Mt Gox and Europe based Bitstamp to become the largest Bitcoin trading exchage.on 19th November 2013, it is reported that one Bitcoin was traded at US $1100. The total Bitcoin holding is said to be roughly 12 million. The marketcap of Bitcoin is therefore expected to be more than US $7.2billion.

The future threat of Bitcoins is that it is likely to be used in replacement of the Swiss Banks  for black money holding, money laundering and financing of criminal activities.

From the Forbes article it appears that China is promoting the currency with the intention of posing a challenge to US dollars as a globally accepted currency as well as  to overcome international sanctions.

The emerging threats of Bitcoins appear to be many and unless we in India start thinking on how we address the threat, the country may face a new threat from the terrorists who may start using this currency for financing anti India activities.

We therefore request RBI and SEBI to start thinking on how to tackle this threat of peer to peer virtual currency.


Related Article in The Hindu

All about Bitcon

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