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> Posted by Elisabeth Rhyne, Managing Director, CFI
The following post was originally published on the IFMR Trust Blog.
The Mor Committee Report offers a radical take on client protection, built around the concept of a legal right to suitability. After describing the recommendations briefly, I would like to tell IFMR’s readership why I’m excited about the approach (two big cheers), provide some thoughts on how to make it work (and how the Smart Campaign could assist), and raise a couple of questions.
Suitability is about ensuring that clients are sold financial services that are appropriate for their circumstances. A suitable product is one the client can be expected to manage with a low probability of serious hardship and a reasonable prospect that it will provide value. The concept has been present for some time in financial consumer protection regulation, most notably in the UK and Australia. The Mor Report proposes a unique approach to implementing suitability, which places responsibility on the service provider to install processes to ensure that clients are sold suitable products, e.g., client targeting and underwriting procedures that adequately assess repayment capacity. Regulation would hold the board of directors responsible for approving and overseeing the implementation of these processes, subject to external review. Hand in hand with this, the report recommends an energetic grievance redress system (which I will not address here), including both internal and external mechanisms to cope with individual problems.
The first big cheer goes to the decision to focus on suitability as the heart of client protection. This directs attention exactly where the greatest potential for harm occurs. Overindebtedness, is perhaps the greatest failure of suitability, resulting from selling loans that exceed a client’s debt threshold. This is why the Smart Campaign places Appropriate Product Design and Delivery and Prevention of Overindebtedness as Client Protection Principles #1 and #2, even ahead of Transparency. Among all the standard client protection problems, only overselling of credit has repeatedly caused sector-wide crisis and collapse, and thus if there is to be a focal point, this is the right one. (The report discusses the relative merits of suitability vs. disclosure as the core of consumer protection policy, which raises both practical and philosophical issues – an engaging topic for another day’s post.)
> Posted by Jeffrey Riecke, Communications Assistant, CFI
Electronic payment systems are spreading so rapidly they’ve become a challenge to size up. Payment cards have been around in some form since the early 20th Century, but their outreach is still far from ubiquitous, even in countries like the United States. To get a sense of where we stand with the expansion of modern payment systems, I compiled some recent statistics from around the world.
In the United States, employers are increasingly using electronic payment cards to distribute compensation. As compared to checks that require processing, the cards receive funds immediately, and can be used like any other payment card to make purchases, transfers, and withdrawals. In 2012, more than $34 billion was loaded onto 4.6 million active payroll cards. By 2017, this is expected to grow to $69 billion over 10.8 million cards.
Electronic payments are experiencing rapid outreach in India in part through the government’s Aadhaar identification card initiative. Increasingly banks are accepting the biometric information-backed Aadhaar numbers as adequate Know-Your-Client information, and as part of its financial inclusion report released last week, the Reserve Bank of India (RBI) Committee on Comprehensive Financial Services for Small Businesses and Low Income Households recommends that every individual over the age of 18 receive an electronic bank account when they’re issued an Aadhaar number. As of December 2013, about half the country’s population had enrolled for the identification cards. The RBI plans to have the entire adult population enrolled in the system by January 2016. Among their utilities, the cards are being used to distribute social benefits of the government’s Direct Benefit Transfer scheme. A recent UBS Securities report estimates that the efficiencies gained from the card-based social benefit system could total up to 1.2 percent of India’s GDP.
> Posted by Center Staff
The Reserve Bank of India (RBI) Committee on Comprehensive Financial Services for Small Businesses and Low Income Households released its much-anticipated final report today. This pathbreaking document sets out an ambitious vision of universal access to financial services within an exceedingly short time frame (by January 1, 2016). The report’s detailed framework to guide financial inclusion policy represents a significant shift towards flexibility in terms of institutional frameworks and product development. It details recommendations in the areas of electronic payments, access to savings and credit, insurance, and consumer protection. It also proposes a comprehensive monitoring framework to track progress.
We look forward to a robust dialogue among Indian financial inclusion actors as they digest the 265-page report.
You can access the report here.
> Posted by Vikas Raj, Senior Investment Officer, Accion Venture Lab
Last week, Raghuram Rajan was officially inaugurated as the 23rd Governor of the Reserve Bank of India. Rajan’s appointment has been greeted by a near obscene amount of excitement and adulation here in India, even by the standards of an often excessive Indian press. The front page of The Economic Times on Thursday (image at right) has Rajan sliding across the page, James Bond-style, rupee-barreled gun in hand. I am very much looking forward to seeing Janet Yellen or Larry Summers do the same.
Rajan’s academic credentials and work experience are indeed impressive – his previous position was chief economic adviser to the Prime Minister, and before that he was chief economist for the International Monetary Fund – but his main claim to fame is correctly predicting in 2005 that risky credit markets in the U.S. could lead to a global financial crisis. That position brought him much derision at the time, including from the likes of Larry Summers, but have of course since proven to be prescient.
But regardless of the strength of his professional and academic background, Mr. Rajan faces a herculean task as the new RBI Governor of a nation facing some serious economic crosswinds. India’s economy is growing at its most tepid pace in four years, its stock market has tumbled in recent months, and inflation continues to rise unabated. Perhaps most strikingly, the rupee has devalued versus the dollar by nearly 20 percent over the last four months. In the meantime, a national election is coming in the spring, which has effectively made consensus and compromise in the always partisan Indian government nonexistent. It will take all of Rajan’s skill to right the ship.
For those of us in the financial inclusion industry here in India, expectations are doubly high. India’s broader travails as an economic laggard affect us deeply, and Rajan’s initial statements and actions as Governor imply, at least, that he is willing to make big changes to help solve short-term monetary ills. If the initial reaction is any indication, Rajan’s presence and changes could actually help – the rupee rose 2.1 percent against the dollar and the Sensex index jumped 2.5 percent on Thursday. Getting India back on track is crucial for the financial inclusion space – low economic growth and persistent inflation hurt low-income populations in many different ways, including leading to fewer construction and manufacturing jobs and higher food prices.
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