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11 August 2014

Dr Raghuram Rajan
Reserve Bank of India
Fort, Mumai!
Sub: Setting up of Differentiated banks Suggestions submitted
for consideration of RBI in response to their draft guidelines
Dear Dr Rajan,
"his Memorandum from Mone#$ife Foundation is in res%onse to the draft guide$ines inviting
suggestions &ith regard to issue of $i'en'e for setting u% of (a#ments anks and )ma$$ Banks,
announ'ed # the *on+$e Finan'e Minister in the ,nion Budget 2014-1.!
/hi$e the idea of e0%anding anking fa'i$ities in the 'ountr# # granting ne& anking $i'en'es,
a$eit of a different t#%e than &hat is e0isting at %resent, is asi'a$$# a %rogressive ste% in the
dire'tion of giving a thrust to finan'ia$ in'$usion, there is a need to make it more f$e0i$e, more
'ustomer friend$# and most im%ortant$# safe and se'ure anking to 'reate trust and 'onfiden'e of
the anking %u$i' in this nove$ e0%eriment of s%reading anking in to unanked and under-anked
areas of our 'ountr#! "o&ards this oje'tive, fo$$o&ing suggestions are made for the kind
'onsideration of RBI in the interest of serving the 'ause of finan'ia$ in'$usion 'ou%$ed &ith
s%reading finan'ia$ $itera'# for the $arger good of our %eo%$e!
"hese suggestions are divided into four %arts, first %art 'overs suggestions &ith regard to (a#ments
anks, se'ond %art re$ating to )ma$$ anks, the third %art 'overs suggestions to e0%and the s'o%e of
differentiated anks to other areas of e'onomi' a'tivit# and the fourth %art 'overs the genera$
suggestions a%%$i'a$e to a$$ t#%es of differentiated anks %ro%osed to e set u% under these
1. Payments Banks:
a! "he guide$ines sti%u$ate that the (a#ments Banks 'an a''e%t on$# demand de%osits u% to
Rs!1,00,0001- %er 'ustomer "his restri'tion to a''e%t on$# demand de%osits to the e0'$usion
of time de%osits is neither in the interest of the %ro%osed ank nor its 'ustomers! Restri'ting
these anks to a''e%t on$# demand de%osits &ou$d for'e the 'ustomer to $ook for another
'ommer'ia$ ank to invest an# %art of his sur%$us funds in fi0ed de%osits, &hi'h &ou$d
virtua$$# negate the enefits of setting u% these anks, as this ma# resu$t in the first ank
$osing the 'ustomer 'om%$ete$# on'e he goes to another ank!
! /e, therefore, suggest that these (a#ments anks must e %ermitted to a''e%t time de%osits
a$so as %ermitted to other 'ommer'ia$ anks, ut &ith a $imit of sa# Rs!.,00,0001- %er
'ustomer! "his $imit 'an e sti%u$ated for de%osits ke%t &ith a$$ the ran'hes of the same
ank # the same 'ustomer! "his $imit 'an e revie&ed as and &hen the anks gro& igger
and de%ending on their satisfa'tor# %erforman'e!
'! In order to en'ourage finan'ia$ in'$usion of those &ho are outside the anking net, it is
desira$e that RBI shou$d %ersuade the government and get the %resent $ega$ re2uirement of
mandatori$# dedu'ting ta0 at sour'e if the interest %aid to an individua$ in e0'ess of
Rs!100001- %er #ear # a ank shou$d e got amended to %ermit a$$ anks not to dedu't ta0
on interest %aid on de%osits to a 'ustomer u% to the $imit of Rs!.0,000 %er #ear %er 'ustomer!
"his &ou$d s#n'hroni3e &ith the $imit of Rs!. $akhs %ro%osed aove for time de%osits that
'an e %$a'ed &ith these (a#ments Banks, &hi'h &i$$ a$so re$ieve these anks from the
tedious %a%er &ork of having to issue "D) 'ertifi'ates ever# 2uarter!
d! )u'h a ste% of in'reasing the $imit for "D) # anks &i$$ oviate the need for dedu'ting ta0
at sour'e &hi'h has een the one of 'ontention for %eo%$e in the rura$ areas to invest their
sur%$us 'ash &ith anks for fear of getting noti'es from the in'ome ta0 and the rigmaro$e of
having to fi$e ta0 returns to get a refund if the# are not $ia$e to %a# ta0!
e! /hen these anks are a$$o&ed to a''e%t time de%osits, as a natura$ 'oro$$ar#, it &i$$ e
ne'essar# to %ermit these anks to $end against the %$edge of these de%osits a$so4 through
the# ma# e %rohiited from other norma$ $ending o%erations!
f! "he added advantage of %ermitting these anks to a''e%t time de%osits for different %eriods
&i$$ e that it &i$$ he$% the anks in ensuring that the mismat'h in their assets and $iai$ities
is ke%t to the minimum, if not 'om%$ete$# e$iminated!
g! In addition to a''e%ting demand and time de%osits, these anks ma# a$so e a$$o&ed to
%rovide safe de%osit $o'kers to their 'ustomers, de%ending u%on the need for su'h servi'es in
rura$ areas!
. Small Banks:
"he guide$ines sti%u$ate that the sma$$ anks sha$$ %rimari$# undertake asi' anking a'tivities of
a''e%tan'e of de%osits and $ending to sma$$ farmers, sma$$ usinesses, mi'ro and sma$$ industries
and unorgani3ed se'tor entities! It 'an a$so undertake other sim%$e finan'ia$ servi'es a'tivities &ith
the %rior a%%rova$ of the RBI!
"he RBI shou$d, ho&ever, ensure that these sma$$ anks do not da$e in s%e'u$ative a'tivities nor
shou$d the# e a$$o&ed to market e0oti' %rodu'ts not easi$# understood # their 'ustomers, &ho are
main$# from the rura$ and the semi-uran areas of our 'ountr#! Besides, these anks shou$d e
'om%$ete$# arred from se$$ing third %art# %rodu'ts $ike mutua$ funds and insuran'e %rodu'ts et'! as
the# 'ater main$# to the i$$iterate and semi-$iterate %o%u$ation &ho 'an e easi$# taken for a ride!
"hese 'onditions shou$d e made am%$# '$ear in the fina$ guide$ines &hen formu$ated so as not to
give raise to an# misgivings in this regard!
Moneylife Foundation 305, 3rd Floor, Hind Service Industries Premises, Off. Veer Savarkar Marg, Near Shivaji Park Seaface,
Dadar (W), Mumbai 400028. Tel: 022-49205000 (Board) Fax: 022-49205022
RBI has stated that the oje'tives of setting u% of sma$$ anks &i$$ e for furthering finan'ia$
in'$usion # %rovision of savings vehi'$es to underserved and unserved se'tions of the %o%u$ation!
RBI has a$so sti%u$ated a 'ondition that these sma$$ anks+ o%erations shou$d e te'hno$og# driven
from the eginning! In order to %rote't the 'ustomers of these anks, &ho are most$# not te'h-savv#
and finan'ia$$# not $iterate, from the risks invo$ved in dea$ing &ith the te'hno$og# driven anks,
RBI shou$d 'ome out &ith '$ear guide$ines to $imit the $iai$it# of the anks+ 'ustomers, &ho use the
te'hno$og# driven %rodu'ts and servi'es, to near 3ero, un$ess the ank is a$e to esta$ish tota$
neg$igen'e on the %art of the 'ustomers!
!. "eed for differentiated banks in the housing finance sector:
RBI has %ro%osed on$# t&o t#%es of differentiated anks, name$# (a#ments Banks and )ma$$ Banks
in the draft guide$ines announ'ed so far! "here is a need for differentiated anks in the fie$d of
housing finan'e, &hi'h is of %aramount im%ortan'e to a $arge %art of our %o%u$ation &ho do not
have a roof over their head! "herefore, dedi'ated *ousing Finan'e Banks 5*FBs6 for e0'$usive$#
$ending to home u#ers is a desideratum for the fo$$o&ing reasons7
a! (resident (rana Mukherjee &hi$e addressing a joint sitting of (ar$iament, $a#ing the
roadma% of the ne& government headed # (rime Minister 8arendra Modi! on 9
2014 had said that # the time the nation 'om%$etes ;. #ears of its Inde%enden'e, ever#
fami$# in our 'ountr# &i$$ have a %u''a house &ith &ater 'onne'tion, toi$et fa'i$ities, 240;
e$e'tri'it# su%%$# and a''ess!
! Fo$$o&ing this %romise, Mr! M! <enkaiah 8aidu, the ,ran Deve$o%ment, *ousing and
,ran (overt# A$$eviation Minister announ'ed that his %riorit# &i$$ e to ensure housing for
a$$ # 2020 and to 'ut interest rate on home $oans! /hi$e this is a $auda$e oje'tive, this
re2uires strategies on different fronts and %roviding finan'e to %eo%$e to o&n houses is the
most im%ortant %art of this initiative!
'! "herefore, %roviding institutiona$ finan'e to the 'ommon man at reasona$e rates of interest
shou$d e the %riorit# to a'hieve the oje'tive! "oda#, s'hedu$ed 'ommer'ia$ anks 5)=Bs6
are the $argest $enders to home u#ers, ut the# have not een a$e to make an im%a't in this
area as this is a $o& %riorit# usiness for them! "heir fo'us is more on $ending to trade,
'ommer'e and industr#, &here the anks have o%%ortunit# to earn e0tra fee in'ome, due to
&hi'h anks are more in'$ined to go for $ending to usiness ventures rather than home
d! As is &e$$ kno&n, housing is a asi' need of ever# human eing ne0t on$# to food and
'$othing! >Roti, ka%ada our Makan? form the three %i$$ars of human e0isten'e! Besides,
deve$o%ment of housing has its ramifi'ations in man# other e'onomi' a'tivities resu$ting in
overa$$ im%rovement in the &e$$-eing of %eo%$e! But the need for housing is ver# $arge and
the mone# re2uired to finan'e su'h a huge demand &i$$ a$so e humongous!
e! A''ording to a re%ort of 8ationa$ *ousing Bank, mortgage to GD( ratio stands at 9 %er
'ent in India in 2012-1@, signifi'ant$# $o&er than the $eve$s a'hieved in most of the
advan'ed e'onomies &here the mortgage markets average is around A0B of GD(! Cven
the e'onomies in the Cmerging Asian region have figures going u% to @1B in Ma$a#sia,
Moneylife Foundation 305, 3rd Floor, Hind Service Industries Premises, Off. Veer Savarkar Marg, Near Shivaji Park Seaface,
Dadar (W), Mumbai 400028. Tel: 022-49205000 (Board) Fax: 022-49205022
19B in "hai$and and 1;B in =hina! It sho&s the e0tent of o%%ortunit# avai$a$e to the
$ending institutions for dee%er %enetration into this unta%%ed market in India! )o there is a
need for 'on'erted efforts to 'reate suita$e institutiona$ frame&ork to su%%$ement the
e0isting institutions to ridge the resour'e ga% that e0ists et&een su%%$# and demand in this
vita$ e'onomi' a'tivit#!
f! "hen there are the housing finan'e 'om%anies 5*F=s6 &ho s%e'ia$ise in $ending to home
u#ers, and the# have een a$e to do a reasona$# good jo of e0%anding their home $oan
%ortfo$io &ithin the $imited resour'es the# have and the restri'ted rea'h due to $imited
ran'h net&ork in metros and uran areas of the 'ountr#! "he# need to go a $ong &a# even
to 'at'h u% &ith anks, &hi'h the# &i$$ e a$e to do if their hands are strengthened #
giving them the status of a ank dedi'ated to the jo of $ending on$# to home u#ers and
other a'tivities in'identa$ to housing!
g! "he 'urrent finan'ing me'hanism %reva$ent in the 'ountr# most$# targets midd$e and high
in'ome se'tions of the so'iet# &hi$e the househo$ds fa$$ing under $o& in'ome and
e'onomi'a$$# &eaker se'tions 'ategor# es%e'ia$$# from the unorgani3ed &ork for'e have no
or $imited a''ess to housing finan'e! "his 'an e attriuted to the re$u'tan'e of the forma$
housing finan'e %roviders $ike 'ommer'ia$ anks to 'ater to these segments due to $a'k of
a%%re'iation of the needs of the unorgani3ed se'tor &hi'h have remained outside the
anking fo$d so far! It is on$# # having dedi'ated housing finan'e anks that the housing
needs of unorgani3ed se'tor 'an e taken 'are of!
h! "hough housing $oans are disursed toda# # oth the 'ommer'ia$ anks and housing
finan'e 'om%anies, it has hard$# met a fra'tion of the needs of our $arge %o%u$ation &ho are
strugg$ing to have a she$ter of their o&n! "he 'ommer'ia$ anks eing engaged in a &ide
variet# of a'tivities 'ou$d give ver# $itt$e attention and fo'us to this im%ortant area of
finan'e so far! "he housing finan'e 'om%anies o%erating in our 'ountr# 'ou$d hard$# meet
the needs of our gro&ing %o%u$ation, &ho need innovative housing finan'e s'hemes &hi'h
'an e %rovided on$# # dedi'ated anking institutions that 'ou$d devote undivided attention
to this '$ass of orro&ers!
i! At %resent there are as man# as .; housing finan'e 'om%anies authorised # the 8ationa$
*ousing Bank in our 'ountr#, ut their 'ontriution # &a# of $ending to this se'tor is
tota$$# inade2uate!
"he fo$$o&ing ta$e &i$$ i$$ustrate this %oint7
Moneylife Foundation 305, 3rd Floor, Hind Service Industries Premises, Off. Veer Savarkar Marg, Near Shivaji Park Seaface,
Dadar (W), Mumbai 400028. Tel: 022-49205000 (Board) Fax: 022-49205022
5Figures in Rs! 'rores6 "ota$ Dutstanding *ousing Eoans! Gro&th B
As on @1!@!2012 As on @1!@! 201@!
(u$i' )e'tor anks7 2,;@,012 @,11,9F2 14!2;
(rivate se'tor anks7 1,@0,@FF 1,.0,21F 1.!21
----------- -----------
"ota$7 )'hedu$ed 'om! Banks7 4,0@,400 4,A2,200 14!A0
*ousing Fin! =om%anies7 2,22,22. 2,90,42; @0!A9
"ota$7 A,2.,A2. ;,.2,A2; 20!@0
Source: National Housing Bank report on trend and progress of housing in India 2013
j! "he RBI has re'ent$# issued guide$ines for issuan'e of $ong term onds # anks for
finan'ing afforda$e housing &ith e0em%tion from regu$ator# %re-em%tions, su'h as =RR,
)ER and ()E 5(riorit# se'tor $ending6 re2uirements on su'h onds! /hi$e this is a good
augur# to en'ourage housing finan'e, it &ou$d gather steam if su'h a fa'i$it# is made
avai$a$e to the s%e'ia$ised *ousing Finan'e Banks to e set u%, as these s%e'ia$i3ed anks
&ou$d e a$e to do fu$$ justi'e to the %ro%osa$, as $ending to home u#ers is their on$# area
of usiness a'tivit#!
k! "he *ousing Finan'e Banks &hen set u% shou$d e a$$o&ed to a''e%t a$$ t#%es of de%osits
$ike an# other 'ommer'ia$ ank, as this fa'i$it# &i$$ he$% these s%e'ia$i3ed anks to ring
do&n their 'ost of funds, &hi'h in turn &i$$ he$% them to redu'e their $ending rates to the
home u#ers!
$! At %resent, the housing finan'e 'om%anies are not a$e to 'om%ete &ith anks main$#
e'ause the# have no a''ess to 'hea% funds and 'onse2uent$# the# are for'ed to $end at
higher rates than anks, &hi'h %uts them at a disadvantage vis-a-vis the anks!
m! As %er the media re%orts, the Finan'e Minister informed the Eok )aha on F
August, 2014,
that the government %$ans to ensure avai$ai$it# of $oans at $o&er interest rate for $o& 'ost
housing for seven 'rore fami$ies under the Mission of Eo&-=ost Afforda$e *ousing!
A'hieving this oje'tive &ou$d e easier if $i'en'es are granted to set u% a fe& s%e'ia$i3ed
anks e0'$usive$# for housing finan'e under the differentiated 'ategor# of anks no&
%ro%osed # RBI!
n! In this #ear+s udget the government has %rovided ta0 enefits for %rin'i%a$ re%a#ment of
housing $oans u% to Rs!1!. $akhs 5raised from Rs!1 $akh6 and interest %a#ment on housing
$oans u% to Rs!2 $akhs 5 in'reased from Rs!1!. $akhs6, &hi'h &i$$ resu$t in greater demand
for housing $oans in the 'ountr#!
o! "he Bui$ding )o'ieties of ,!G are the est e0am%$es of ho& s%e'ia$i3ed institutions &ith
anking status 'an 'reate a revo$ution in housing finan'e in the 'ountr#! "hough their
'onstitution is a mutua$ so'iet#, the# have een a$e to %$a# a ver# 'ru'ia$ ro$e in
Moneylife Foundation 305, 3rd Floor, Hind Service Industries Premises, Off. Veer Savarkar Marg, Near Shivaji Park Seaface,
Dadar (W), Mumbai 400028. Tel: 022-49205000 (Board) Fax: 022-49205022
s%reading home $oan 'on'e%t among a $arge numer of 'iti3ens in that 'ountr# # their
innovative offerings and nove$ home $oan stru'tures, &hi'h anks &ere not &i$$ing to do!
"his is due to their getting a status of a ank, a''e%ting oth demand and time de%osits from
their 'ustomers, &ho are main$# home u#ers, and %roviding mu'h etter %ersona$i3ed
servi'es to this '$ass of ank 'ustomers! As %er the media re%ort, the Bui$ding )o'ieties in
,!G no& 'ontro$ more than A0B of the mortgage $ending market &hi'h is the resu$t of their
'on'entrated attention to one usiness a'tivit# and &inning over 'ustomers through etter
'ustomer servi'e! "his has resu$ted in mortgage to GD( ratio of ,!G rea'hing a high $eve$ of
F0B &hi'h is a 'ommenda$e!
%! In India too, &e 'an deve$o% su'h s%e'ia$i3ed institutions # u%grading some of the housing
finan'e 'om%anies into housing anks, and %ermitting ne& entrants a$so into this fie$d, as
the demand for housing $oans is e0%e'ted to gro& e0%onentia$$# &ith mu'h greater gusto in
the #ears to 'ome!
2! "here are .; housing fian'H 'om%anies 5*F=s6 at %resent registered &ith 8ationa$ *ousing
Bank, ut on$# aout eight 'om%anies have een $isted in the sto'k e0'hanges! If some of
these 'om%anies meet the fit and %ro%er 'riteria of RBI, the# 'an 'ertain$# e 'onsidered for
u%-gradation into fu$$-f$edged *ousing Finan'e Banks, &hi'h 'an 'reate a remarka$e
im%rovement in the home $oan market in our 'ountr#!
r! *o&ever, RBI as a regu$ator shou$d 'ome out &ith a%%ro%riate 'he'ks and a$an'es for a$$
the housing finan'e anks, if and &hen $i'ensed, to ensure that the# &ork on sound $ines and
do not go the &a# of Freddie Ma' and Fannie Mae of ,!)!A, and meet the e0%e'tations of a
$arge majorit# of our %eo%$e &ho as%ire to o&n homes # avai$ing $oans at reasona$e rates
of interest!
s! "he ha%%iness of %eo%$e is dire't$# 'o-re$ated to the home o&nershi% enjo#ed # the %eo%$e!
B# making avai$a$e housing finan'e easi$# and as 'hea%$# as %ossi$e, %eo%$e of our
'ountr# &i$$ sure$# # ha%%ier than efore! In the g$oa$ ha%%iness ranking $ist of $ast #ear,
India stands at rank 8o! 111, mu'h after (akistan 5rank7F16 and Bang$adesh 510F6! (roviding
housing to our %eo%$e as %romised # our government shou$d he$% our 'ountr# to '$im a
fe& ste%s in the $adder of g$oa$ ha%%iness inde0 in the 'oming #ears!
#. $eneral Suggestions applicable to all type of differentiated banks:
A! A$$ t#%es of differentiated anks to e $i'ensed no& or in the future shou$d e arred from se$$ing
a$$ t#%es of third %art# %rodu'ts $ike mutua$ funds, insuran'e et'! as the# ma# e tem%ted to mis-se$$
these %rodu'ts to in'rease their non-interest in'ome! But this &i$$ e at a ver# heav# 'ost to their
'ustomers, &ho eing i$$iterate and semi-$iterate 'an e easi$# taken for a ride and this &i$$ 'ause
unto$d miser# and grief to these ha%$ess ank 'ustomers &ith no re'ourse to redress their
B! "o deve$o% trust and 'onfiden'e in these ne& ut sma$$ anks, there is a need to in'rease the
de%osit insuran'e 'over to at $east Rs! Five $akhs %er 'ustomer from the %resent Rs! Dne $akh, as
this &i$$ serve to give a oost to these anks during the initia$ %eriod of their o%erations!
Moneylife Foundation 305, 3rd Floor, Hind Service Industries Premises, Off. Veer Savarkar Marg, Near Shivaji Park Seaface,
Dadar (W), Mumbai 400028. Tel: 022-49205000 (Board) Fax: 022-49205022
=! "he higher de%osit insuran'e 'over stated aove 'an e made avai$a$e on$# to the 'ustomers of
these s%e'ia$i3ed anks, ti$$ the# 'ontinue in this ra'ket, to he$% them to 'om%ete &ith igger anks
and attra't 'ustomers into their fo$d! "his in'entive &i$$ e the on$# too$ to make this nove$
e0%eriment of differentiated anks a su''ess!
D! "here is a need for RBI to 'ome out &ith stringent guide$ines to ensure that these anks %rovide
the servi'es e0%e'ted of them &ith utmost di$igen'e and in a satisfa'tor# manner! Dther&ise the#
&i$$ %romise ever#thing under the sun ut fai$ to de$iver not on$# &hat is %romised, ut ma# even
take advantage of the ignoran'e and he$%$essness of their 'ustomers, &ho &i$$ e $eft high and dr#,
there# undermining the ver# %ur%ose of setting u% these institutions!
C! In ear$# A%ri$ this #ear, RBI had announ'ed that it &ou$d 'ome out &ith 'om%rehensive 'ustomer
%rote'tion guide$ines in the anking industr# to ensure that anks do not take advantage of the
'ustomer+s diffi'u$t# or inattention et'! But these guide$ines are #et to see the $ight of the da# even
after a $a%se of four months! "here is an urgent need for ensuring that these 'ustomer %rote'tion
guide$ines are %ut in %$a'e &e$$ efore dis%ensing these $i'en'es for ne& anks, so as to ensure that
on$# the serious %$a#ers &ith fu$$ kno&$edge of the risks and re&ards enter this fie$d for a $ong hau$
in this usiness!
Iours sin'ere$#,
)u'heta Da$a$,
"rustee, Mone#$ife Foundation
Moneylife Foundation 305, 3rd Floor, Hind Service Industries Premises, Off. Veer Savarkar Marg, Near Shivaji Park Seaface,
Dadar (W), Mumbai 400028. Tel: 022-49205000 (Board) Fax: 022-49205022