GS-1, Social Empowerment, Uncategorized

Provide loans to women SHGs at 7 per cent: RBI to banks

The Reserve Bank has asked banks to provide loans to women self-help groups (SHGs) at 7% per annum, as per the government’s revised guidelines for 2016-17. All women SHGs are eligible for interest subvention on credit up to Rs 3 lakh at 7% per annum under Deendayal Antyodaya Yojana-National Rural Livelihoods Mission.


  • As per the RBI notification, the banks will lend to all the women SHGs in rural areas at 7% in 250 districts.
  • However, SHGs availing capital subsidy under SGSY in their existing credit outstanding will not be eligible for benefit under this scheme.
  • All banks will be subvented to the extent of difference between the weighted average interest charged and 7%, subject to the maximum limit of 5.5% for 2016-17.
  • This subvention will be available to all the banks on the condition that they make SHG credit available at 7% annually in the 250 districts.
  • Further, the SHGs will be provided with an additional 3% subvention on the prompt repayment of loans.

Deen Dayal Antyodaya Yojana – NRLM:

Aajeevika – National Rural Livelihoods Mission (NRLM) was launched by the Ministry of Rural Development (MoRD) in June 2011. Aided in part through investment support by the World Bank, the Mission aims at creating efficient and effective institutional platforms of the rural poor, enabling them to increase household income through sustainable livelihood enhancements and improved access to financial services.

  • Under the scheme, the poor would be facilitated to achieve increased access to rights, entitlements and public services, diversified risk and better social indicators of empowerment.
  • In November 2015, the program was renamed Deen Dayal Antayodaya Yojana (DAY-NRLM).
Editorials, GS-3, Uncategorized

P2P lending: towards easy funding



  • Analysis of the guidelines issued by the Reserve Bank of India (RBI) on peer-to-peer (P2P) lending.

What is P2P lending?

  • To bridge the gap of unavailability of proper formal credit, an aggressive breed of loan providers has emerged in India, called peer-to-peer (P2P) lending.
  • The concept is not new—it is basically an individual, who is not a financial institution, lending money to another individual.
  • P2P lending is similar to a friend lending to you, but in this case, you have to pay an interest on the loan and the lender is a stranger.
  • Online P2P lending companies work as marketplaces that bring individual borrowers and lenders together for loan transactions without the intervention of traditional financial institutions such as banks and NBFCs.
  • Through partnerships with leading banks, P2P lending is now moving towards offline channels.

RBI guidelines

RBI has proposed following key areas to frame the regulatory guidelines around P2P lending.

(1) permitted activity; (2) reporting, (3) prudential and governance requirements; (4) business continuity planning and (5) customer interface.

Analysis by the author

Scope of permitted activites:-

  • The scope of permitted activities needs to be defined clearly, especially in view of the aggressive expansion plans of P2P players.
  • For instance, what kind of advertisements can be displayed on the websites of these portals.

Regulation of Guarantees

  • The aggressive lending plans of P2P players may lead to questionable practices such as credit enhancement or other financial incentives offered by the P2P platform.
  • If these platforms are allowed to give guarantees, then some prudential norms need to be put in place.
  • Alternatively, P2P lenders could also take the benefit of availing specific products, such as credit risk protection from a registered Indian insurance company.
  • There is a possibility that many lenders could get duped into investing because of the guarantee, which may be difficult to meet at a later date.
  • Perhaps, their performance should be observed before the RBI allows them to continue with their guarantees and if approved, then provide them with an insurance against it.

Differentiation is required

  • There needs to be clarity on the maximum ticket size of transaction that can be serviced by a P2P lender to clearly differentiate them from other lenders, such as microfinance institutions and banks.

Periodic assessment of the lending pool

  • There should be a periodic assessment of the lending pool by an independent credit rating agency.

“Brick-and-Mortar” presence in India.

  • The compulsion for P2P lenders to set up an office will enable personal scrutiny of records, but could result in operational inefficiencies.
  • Instead, RBI could take a cue from the ‘online only’ foreign banks. Mandating disclosure requirements on their websites can increase efficiency and improve transparency of the model.

Protect the stakeholders

  • The interests of stakeholders, especially lenders, in case the platform goes bankrupt, should be protected.
  • There needs to be clarity on whether all contracts will continue to stay enforceable and how will investors be serviced.


  • The guidelines should strike a balance between overregulation and leaving too many loopholes. If guidelines are too strict and harsh, it will bring down the P2P market.
  • If P2P isn’t well regulated and things get ugly, the government will come back with heavy restrictions.
  • But, in any case, the guidelines will bring awareness about the sector and more individual lenders will come on board.
  • To conclude, P2P lending has the potential to be disruptive. Hence, its platform guidelines should not promise extraordinary returns to lenders
Editorials, GS-3, Indian Economy, Uncategorized

Measuring Mudra’s success

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Prime Minister Modi, in a recent interview, indicated that his focus was to create a third sector—the personal sector—other than farms and factories wherein a person turns into a job provider through entrepreneurship rather than a job-seeker in the other two sectors. This statement assumes significance as it has many policy implications for the next few years.

  • The government has already been active in translating this vision into reality. The Pradhan Mantri Mudra Yojana (PMMY) is one of the cornerstones of this policy.
  • According to estimates, the total amount of loans disbursed under the PMMY programme crossed Rs.1.25 trillion as of March 2016.

About the Pradhan Mantri MUDRA Yojana (PMMY) scheme:

The PMMY Scheme was launched in April, 2015. The scheme’s objective is to refinance collateral-free loans given by the lenders to small borrowers.

  • The scheme, which has a corpus of Rs 20,000 crore, can lend betweenRs 50,000 and Rs 10 lakh to small entrepreneurs.
  • Banks and MFIs can draw refinance under the MUDRA Scheme after becoming member-lending institutions of MUDRA.

Significance of this scheme:

  • It will greatly increase the confidence of young, educated or skilled workers who would now be able to aspire to become first generation entrepreneurs.
  • Existing small businesses, too, will be able to expand their activities.
  • Under the scheme, by floating MUDRA bank, the Centre has ensured credit flow to SMEs sector and has also identified NBFCs as a good fit to reach out to them.
  • People will now be able to get refinance at subsidised rate and it would be passed on to the SMEs. Moreover, it would enable SMEs to expand their activities.

There are three types of loans under PMMY:

  1. Shishu (up to Rs.50,000).
  2. Kishore (from Rs.50,001 to Rs.5 lakh).
  3. Tarun (from Rs.500,001 to Rs.10,00,000).

MUDRA Yojana has to address the following challenges:

  • One of the most persistent problems that Indian economy is facing is the inequitable distribution of funds. The larger portion of the capital is available to the bigger companies whereas too little of the capital is distributed to micro, small and medium business sector.
  • At present the non-profit micro financing institutes (MFI’s) are not able to provide enough support to small businesses. The commercial banks are also hesitant to provide funds to small and medium entrepreneurs. They avoid exposure to this particular segment because they consider it highly risky in nature with no performance history.
  • Even within the organized sector in India, it is the larger units that are deploying the most capital, providing the most jobs, wages and emoluments and generating the most output. Also, only 2% of the factories covered by the ASI generate net value-added (NVA) of over Rs.50 crore. They employ a quarter of the total employed in factories, provide 40% of all emoluments; generate half the total output from factories and 71% of NVA. Small businesses hardly come into picture.
  • Another problem is that as firms age in India they fail to employ more people. Even as firms become more than three decades old, they do not employ more people. If anything, employment size, relative to the size of employment at the birth of the firm, goes down.

Way ahead:

The government should measure the success or failure of its interventions including Mudra Yojana by the extent of reduction in informal employment, the rise in formal employment and the extent of mobility of firms to medium and large sizes. Objective criteria will help in making these decisions in an apolitical fashion. For that, one of the conditions of the loans must be that entrepreneurs start to maintain books of accounts on employment, output, revenues, expenses and taxes. Government should also bring in policy measures to create incentives for firms in India to increase their size. The aim of policy must be to make them grow out of their sizes at birth.


Under this scheme, Rs.1.25 trillion disbursements have been done in the space of less than a year. If such rates of growth were maintained, they would constitute a sizeable chunk of total non-farm credit in the economy. Therefore, given its importance to the future evolution of the economy, it is useful to have as precise an idea as possible, ex-ante, of the economic and social outcomes that the government is seeking with such generous credit support.

GS-3, Indian Economy, Uncategorized

RBI for easier bank permits

As part of its plan to put universal bank licences ‘on tap’, the Reserve Bank of India has unveiled draft guidelines that could encourage big non-banking financial players to throw their hats in the banking ring.

What is ‘on tap mechanism?

The central bank has been opening the bank licence window only periodically. Under the ‘on tap’ mechanism, however, an application can be made at any time subject to certain conditions.

Who is eligible?

According to the draft RBI guidelines, non-banking finance companies and resident individuals or professionals with 10 years of experience in banking and finance will be eligible to apply.

  • Also eligible are private sector entities and groups owned and controlled by residents, provided they have total assets worth at least 5,000 crore, with the non-financial group business not accounting for more than 40% of the total assets or the gross income.
  • Individuals and companies directly or indirectly connected with large industrial houses may also take equity in a new private bank but only up to 10%. Such shareholders will not get any representation on the board.

Capital requirements:

  • The initial minimum paid-up voting equity capital for a bank has been left unchanged at 500 crore. But the bank has to have a minimum net worth of Rs. 500 crore at all times.
  • The promoters need to hold a minimum 40% of the paid-up voting equity capital, which will be locked-in for five years from the date of commencement of business. The RBI has allowed banks to get their shares listed within six years (three years earlier) of commencement of business.
  • In the case of an NBFC applying for a licence, if the entity has diluted the promoter shareholding to below 40% but above 26%, the RBI may not insist on the promoters’ minimum initial contribution. However, the lock-in period of five years will apply to the 26% promoter shareholding.
GS-3, Indian Economy, Uncategorized

Deepak Mohanty Committee on Financial Inclusion

  • The Reserve Bank of India (RBI) has released the Report on Medium-term Path on Financial Inclusion submitted by 14-member committee headed by RBI Executive Director Deepak Mohanty
  • RBI had constituted the committee in July 2015 to examine the existing policy regarding financial inclusion and a five-year (medium term) action plan
  • It was tasked to suggest plan on several components with regard to payments, deposits, credit, social security transfers, pension and insurance

Key recommendations:

  • Augment the government social cash transfer in order to increase the personal disposable income of the poor- It would put the economy on a medium-term sustainable inclusion path
  • Sukanya Shiksha Scheme: Banks should make special efforts to step up account opening for females belonging to lower income group under this scheme for social cash transfer as a welfare measure
  • Aadhaar linked credit account: Aadhaar should be linked to each individual credit account as a unique biometric identifier which can be shared with Credit information bureau to enhance the stability of the credit system and improve access
  • Mobile Technology: Bank’s traditional business model should be changed with greater reliance on mobile technology to improve ‘last mile’ service delivery
  • Digitisation of land records: It should be implemented in order to increase formal credit supply to all agrarian segments through Aadhaar-linked mechanism for Credit Eligibility Certificates (CEC)
  • Nurturing self-help groups (SHGs): Corporates should be encouraged to nurture SHGs as part of Corporate Social Responsibility (CSR) initiative
  • Subsidies: Government should replace current agricultural input subsidies on fertilizers, irrigation and power by a direct income transfer scheme as a part of second generation reforms
  • Agricultural interest subvention Scheme: It should be phased out
  • Crop Insurance: Government should introduce universal crop insurance scheme covering all crops starting with small and marginal farmers with monetary ceiling of Rs. 2 lakhs
  • Multiple Guarantee Agencies: Should be encouraged to provide credit guarantees in niche areas for micro and small enterprises (MSEs). It would also explore possibilities for counter guarantee and re-insurance
  • Unique identification of MSME: It should be introduced for all MSME borrowers and information from it should be shared with credit bureaus
GS-3, Indian Economy, Uncategorized

Pradhan Mantri Mudra Yojana: Funding the unfunded


Pradhan Mantri Mudra Yojana (PMMY) is a flagship scheme of Government of India to enable a small enterprise come into the formal financial system and get affordable credit to run his/ her business.

  • Who? Any Indian Citizen who has a business plan for a non-farm sector income generating activity
  • Credit need? Less than Rs 10 lakh
  • Possible Creditors? Banks, MFI, or NBFC

Types of Loans provided

Under the aegis of Pradhan Mantri MUDRA Yojana, MUDRA has already created the following products / schemes.

  • Shishu : covering loans upto 50,000/-
  • Kishor : covering loans above 50,000/- and upto 5 lakh
  • Tarun : covering loans above 5 lakh and upto 10 lakh

Note that there is no subsidy for the loan given under PMMY. However, if the loan proposal is linked some Government scheme, wherein the Government is providing capital subsidy, it will be eligible under PMMY also.


What is MUDRA Bank and what is its role in the MUDRA Yojna?

  • MUDRA Bank = Micro Units Development and Refinance Agency Bank
  • The Rs 20,000 crore MUDRA Bank aims to provide refinancing to small and medium enterprises, particularly those from SC & ST
  • The idea is to refinance micro-finance institutions through Pradhan Mantri Mudra Yojana
  • This bank would be responsible for regulating and refinancing all MFIs which are in the business of lending to MSME

Are there any concerns regarding the structure or establishment of MUDRA bank?

  • The bank will be financially challenged since inception, if it is funded through non-budgetary support
  • The funds for the bank would be sourced from shortfall in the achievements of the priority sector lending (PSL) targets
  • Currently, the shortfall in the PSL targets of the domestic scheduled commercial banks are deposited in Rural Infrastructure Development Fund (RIDF) and for foreign banks in Small Enterprises Development Fund
  • The fact of the matter is that banks have been surpassing the targets in all years, since 2002, except for the last three years
  • The shortfall lies only in agricultural loans, but it would be unfair to divert the target for agriculture from RIDF to micro units

What are some of the positive points which go in favour of such a scheme?

  • Informal sector accounts for 90% of our non-agricultural workforce, 50% of the GDP & 40% of the non-farm GDP
  • Analysts point that the Indian GDP can be raised by almost 15% if the informal sector data is incorporated in the GDP series
  • The MUDRA bank aims to boost loans and cut borrowing costs for the cash-starved domestic small businesses

But has a direct intervention from government (to facilitate loans) worked in past?

What are some of the prominent concerns in this area?

  • There is always a case for direct government intervention to solve any one of our many chronic problems, to justify the need for MUDRA bank
  • The govt. is trying to ensure equity through determined government action that previously drove the govt. to nationalise banks and bring priority sector lending
  • However, such ‘directed credit’ has not worked successfully in the past
  • The govt. control over banks had led to large-scale corruption and repeated recapitalisation through taxpayers’ money
  • MUDRA bank has been over-burdened with many conflicting objectives and too-many roles, viz. a lender, consultant, regulator, think tank and an agent of social change
Editorials, Uncategorized

From Plate to Plough: How to expand inclusion

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Financial inclusion and financial literacy have been important policy goals for quite some time. Inclusion has been emphasized by various governments since independence. There is a long history of financial inclusion in India. For the present government, financial inclusion is an important policy pillar to ensure inclusive development.

What is ‘Financial Inclusion’?

It has traditionally been understood to mean opening new bank branches in rural and unbanked areas. Nowadays, however, financial inclusion is seen to be something more than opening bank branches in unbanked areas to take formal financial services across the length and breadth of the country.

  • Simply put, financial inclusion aims to mainstream financial services for the masses, especially credit at affordable costs from institutional sources.

Brief Background:

Various governments have tried to promote financial inclusion in the country through various policy measures. It is in this regard that the bank nationalisation took place.

  • There have been some successes during 1951 to 1991, when the share of outstanding debt of rural households to institutional sources increased from 7.2% in 1951 to 64% by 1991.
  • But thereafter, the period of economic reforms showed a dismal performance, with the share of institutional sources declining from 64 to 56% during 1991-2013. This is one of the biggest lapses of the economic reforms.

Jan Dhan Yojana (JDY):

Realising the importance of financial inclusion, the incumbent government took a bold step by introducing the Jan Dhan Yojana (JDY).

  • Looking at the speed at which the bank accounts have been opened, one can easily say that the scheme has been a massive success. It has already found its place in the Guinness Book.
  • So far, around 20 crore bank accounts have been opened, and more than Rs30,000 crore deposits received under JDY.

For the Jan-Dhan Yojana to succeed the following steps should be considered:

  • The business correspondent model should be extended to include entities such as kirana shops, corporates and others. It is obvious that BCs need to be properly remunerated and have the full support of banks. Banks have tied up with common service centres (CSCs) as BCs.
  • Insistence on KYC (know your customer) norms has hindered the opening of new accounts even in urban areas. Great significance is, therefore, attached to e-KYCs. The Aadhaar can play an extremely useful role.
  • Since mobile banking through phones is to play an increasingly important role in a scenario where physical bank branches will be few, greater co-ordination between mobile telephone companies and banks will be necessary.
  • It goes without saying that State governments’ support will be crucial.
  • Commercial viability will be the key to the programme’s success. Past experience suggests that without proper incentives, the facilities on offer will not be used by the really needy. Banks will be saddled with a large number of dormant accounts.

Challenges before the government:

Now, the real challenge before the government is to prevent these accounts from remaining dormant. Hence, to ensure that JDY remains active and relevant in fulfilling its objective, the PM had asked the RBI to prepare a roadmap for financial inclusion and to fulfill this objective a committee was formed.

  • The RBI Committee on Medium-Term Path on Financial Inclusion submitted its report to the government in December 2015.
  • The committee emphasised the role of a holistic strategy involving players like telecom operators, biometric systems, payment banks and land registrars for “last mile” service delivery.

Key recommendations made by the committee:

  • Phase out of interest subvention scheme.
  • Open more accounts for females.
  • Implement a new welfare scheme for girl child — Sukanya Shiksha.
  • Step up financial inclusion in north-eastern, eastern and central states.
  • Link Aadhaar to each individual credit account.
  • Use low-cost solution based on mobile technology for ‘last mile’ delivery.
  • Recommends commercial banks to open specialised interest-free windows with simple products.
  • Recommends RBI to take lead in creating a geographical information system to map banking access points.
  • Suggests more ATMs in rural centres.

Analysis of key recommendations:

Phasing out of Interest subvention scheme:

The interest subvention scheme was introduced in 2006-07, with the objective of providing substantial and cheap loans — at 7% interest (upper limit of Rs 3 lakh), and if payment is regular, gradually lowered to 4%. Some states have extended loans even at zero interest rate to farmers.

  • This has resulted in a significant increase in short-term agricultural credit, with actual disbursements consistently surpassing targets. This is hailed as a grand success and the subsidy on account of it has increased from Rs 3,283 crore in FY12 to Rs 13,000 crore in FY16.

But this could be deceptive and a potential agri-credit scam. Why?

There’s reasonable evidence that a significant proportion of crop loans granted at subvented interest rates isn’t reaching target beneficiaries.

  • A farmer who receives loans at a concessional rate of 4% can easily deposit at least a part of it in fixed deposits in the bank, earning about 8% interest, or even becoming a moneylender to offer loans at 15-20% interest to those who don’t have access to institutional sources of finance.
  • A bigger proof is the fact that short-term credit from institutional sources reached 110% of the total value of agricultural inputs in 2014 (NAS 2015), and at the same time, the data also showed that 44% loans were from non-institutional sources in 2013.
  • This suspicion is reaffirmed when one looks at the month-wise disbursement of agricultural credit, which spiked to 62% cent of annual disbursement in the last quarter of 2014, with no corresponding spike in agri-production activities.
  • Also, there is no evidence to show that the Centre’s interest subvention scheme has reduced farmer indebtedness.

Hence, the RBI committee recommended phasing out the interest subvention scheme, and has asked the government to move towards universal crop insurance. The latest crop insurance scheme is expected to cost the Centre around Rs 9,000 crore. This could easily be financed by releasing funds allocated to interest subvention.

Income support:

The report also states that meaningful financial inclusion will be elusive without social cash transfers fromgovernment-to-person (G2P). Recognising large leakages in welfare and anti-poverty schemes, many countries have moved from price support to income support.

  • However, India uses price policy (subsidised inputs) to support farmers and PDS grains for consumers. Such policies are inefficient and at times regressive, as they promote leakages and sub-optimal use of scarce resources.
  • Recent policy interventions utilising DBT in LPG subsidy have seen good success. Similar efforts are needed for food and input subsidies.


If implemented properly, Jan Dhan Yojana can be a gamechanger in alleviating poverty at a much faster pace than has been the case under economic reforms. Challenges of implementation will remain unless the government displays the same vigour and perseverance as it did in opening accounts under this scheme.

GS-3, Indian Economy, Uncategorized

RBI panel for more financial inclusion steps

Deepak Mohanty Panel report on medium-term path on financial inclusion.

The recommendations include

* Banks have to make special efforts to step up account opening for females. Given the government’s emphasis on the welfare of the girl child, it suggested that the government can consider a welfare scheme—Sukanya Shiksha —that can be jointly funded by the central and state governments.
* Aadhaar should be linked to each individual credit account and the information shared with credit information companies. This will not only be useful in identifying multiple accounts, but will also help in mitigating the overall indebtedness of individuals.
* To increase formal credit supply to all agrarian segments, the digitisation of land records should be taken up by the states on a priority basis
* To ensure actual credit supply to the agricultural sector, Aadhaar-linked mechanism for credit eligibility certificates should be introduced
* Phasing out the interest subvention scheme and ploughing the subsidy amount into a universal crop insurance scheme for small and marginal farmers
* A universal crop insurance scheme covering all crops should be introduced starting with small and marginal farmers with a monetary ceiling say of ·2,00,000. The insurance should be mandatory for all agricultural loans
* The government may restructure the Agriculture Insurance Company (AIC) to take up the role of a dedicated ‘Crop Insurance Corporation’
* Satellite imagery can be used for ‘crop mapping’ and to assess damage.  GPS-enabled hand-held devices can be used for ‘ground trothing’. In addition, drones and dove, micro satellites could also be deployed to assess crop damages.
* A system of unique identification for all MSME borrowers and the sharing of such information with credit bureaus to be set up
* Commercial banks in India may be enabled to open specialised interest-free windows with simple products like demand deposits, agency and participation securities on their liability side and to offer products based on cost-plus financing and deferred payment, deferred delivery contracts on the asset side
* Banks will have to consider introducing a cash management system that can help to scale up BC operations
* Banks need to introduce a simple registration process for customers to seed their mobile number for alerts as well as financial services
* The financial literacy centre network needs to be strengthened to deliver basic financial literacy at the ground level. Lead banks need to identify a few lead literacy officers who could train the people manning FLCs