Here are our picks:

1. De-regulation of savings account interest rates
2. Listing of securitised debt instruments
3. Launch of Credit Default Swap (CDS) contracts
4. Expansion of Inter-Bank Mobile Payment System (IMPS)
5. Growing momentum on unified KYC

Happy new year to all our readers and let’s look forward to more far-reaching reforms in 2012.

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By Deepti George, IFMR Finance Foundation

IFMR Finance Foundation worked with Pension Fund Regulatory and Development Authority of India (PFRDA) as Knowledge Partners to help organise their first NPS-Lite Aggregators’ Meet in New Delhi, on 21st November, 2011. The meet brought together aggregators and other stakeholders under one roof, to address issues and concerns faced while distributing NPS-Lite and Swavalamban benefits to their customers.

The Meet was attended by all senior members of PFRDA along with representatives from over 25 different organisations, including Nitin Chaudhary and Anil SG from IFMR Rural Finance who were also part of separate panels. PFRDA used this opportunity to announce a new incentive scheme for the Aggregators where they increased the fixed incentive from INR 50 to INR 100. PFRDA also released new communication material that was designed specific to each aggregator’s need and could be used for creating awareness about pensions, NPS-Lite and Swavalamban benefits.

The Meet kicked off with an opening statement by Mr.P Upadyay, Chief General Manager, PFRDA, and was followed by an overview of the two pension schemes, NPS Lite and Swavalamban, by Ms.Padma Iyer Kaul, Executive Director, PFRDA. She set the tone of the conference by highlighting the importance of pensions and guided the participants in practically addressing the issues they may have with the two schemes. Mr.Yogesh Agarwal, Chairperson, PFRDA, also graced the conference with his presence and thanked the aggregators for their efforts.

The Meet brought critical issues to the table resulting in lively discussions on product design, need for a standardised method of delivery through technology and the inherent necessity for a nation-wide awareness campaign to highlight pensions as an important financial planning tool.

In response to the concerns highlighted, some fascinating suggestions and innovations, few already being implemented by Aggregators, were brought to light. Some of these are:

1) The need to develop communication and marketing collateral that can be deployed to create awareness and educate people on pensions – in order to create the market for pensions
In this context, Nitin Chaudhary, explained the Wealth Management approach of KGFS entities that has enabled it to become the leading aggregator in terms of penetration of NPS Lite. He also shared training materials and flipcharts currently being used at KGFS. South Indian Bank also shared their ideas they had successfully implemented, where they used the NPS-Lite logo on all receipts and envelopes. A few aggregators like Bandhan Financial Services and Department of Women and Child Development (DWCD) had even developed their own passbooks to record transactions and help customers keep track of their contributions.

2) The importance of building technology platforms which help to reduce transaction and process costs along with reducing operational risk
Mr. Amit Sinha, from NSDL suggested that using mobile phones for transactions would encourage portability across aggregators and increase efficiency. It was also suggested that creating applications that could be shared with all Points of Purchase was cost-effective and easy to build, also paving way for inter-operability between aggregators, and across locations. Inter-operability was especially important given that the access to this long-term product must not be aggregator-dependent.

3) Concerns relating to delayed issuance of PRAN (Permanent Retirement Account Number) cards and data errors
IFMR Rural Finance shared its feat of being the first aggregator to generate PRAN directly in collaboration with the CRA (Central Recordkeeping Agency), thereby reducing TAT to less than 24 hours. Data errors could also be minimized by IFMR Rural Finance as the application forms get pre-populated with customer details directly from the Customer Management System rather than by a manual data-entry process.

4) KYC requirements contribute to exclusion of segments of the population, especially the migrant population
Ms. Gayathri of Labour Net suggested that given the essentially floating nature of migrant populations that could potentially enroll for NPS-Lite, a more diverse set of documents could be included for KYC norms to enhance outreach. It was also suggested that a “one-size-fits-all” strategy should not be adopted for the given target population, but rather there is a need to develop different strategies for different segments such as the stable urban poor, the daily wage migrants, seasonal migrants, and so on.

5) Increase benefits and attractiveness of NPS Lite and Swavalamban for the customer
It was suggested by Anil SG of IFMR Rural Finance that NPS-Lite may be clubbed with health insurance products like RSBY to take care of a gamut of eventualities that the individual or household may face, which may otherwise force them to dip into their pension corpus. This would provide customers with multiple benefits, mitigating not only longevity risk but also addressing to an extent, health shocks.

Going forward, IFMR Finance Foundation is drafting a report collating recommendations of participants from the Meet and suggesting ways forward for the NPS-Lite and Swavalamban schemes.

By Dr. Nachiket Mor

These are some of my observations from a conference that I attended recently organised by the National Community Investment Fund (NCIF) for a specific class of US institutions: CDFI (Community Development Financial Institutions) Banks. The regulators present at the conference were deeply appreciative of the critical role that these banks had played over the last few years and reported that several of these small banks had weathered the entire crisis well and overall, unlike in the case of larger banks, had even seen a small increase in their overall lending portfolio.

CDFI Banks are typically:

1. Full service banks.
2. Have FDIC insurance and offer checking and savings bank accounts.
3. They are for-profit institutions.
4. Of the over 7,500 banks in the US, 6,700 have less than $1 billion (Rs.5,000 crore) in assets and 4,400 have less than $250 million (Rs.1250 crore) in assets. Of these 6,700 small banks / community banks about 85 are certified by the CDFI Fund as CDFI Banks which gives them access to several financial benefits from the US government.
5. CDFI Banks are about 10% of the total CDFIs in the country but they control/manage over 50% of the total CDFI assets.
6. NCIF estimates that there are another 400-500 institutions that have not yet been certified or don’t want to be certified despite their mission of serving low- and moderate-income communities. NCIF uses the term “Community Development Banking Institutions or CDBIs” to describe them.

The opening speech at the conference was given by Sandra Thompson, Director, Division of Risk Management Supervision, FDIC. It was an unusual speech coming from a regulator in its warmth and appreciation of the strong role that community banks like CDFI Banks were playing in the economy. This warmth was also displayed by other regulators that spoke at the conference and was perhaps due to that the fact that, unlike in India where there is a sense that the government owned financial institutions need to be protected and the private sector is viewed with suspicion, here there is no such predisposition. Several issues were raised by her that suggested that these institutions needed special consideration:

• CDFI Banks were working in very difficult parts of the economy, ones that larger banks were unwilling or unable to serve. This meant that even though the overall economy, in her words, was “experiencing a fragile recovery”, the areas being served by the CDFI Banks were still in deep trouble.
• The TARP programme was really designed for the larger banks and such funds were not made available to the smaller community banks. During 2010 the Treasury created a special Community Development Capital Initiative to support CDFI Banks and Credit Unions.
• The new compliance requirements (over 2300 pages of them) imposed on Banks by the Dodd-Frank Act were proving to be very expensive for several of the smaller banks.

These comments of hers were related to the big issues that kept coming up during the entire day of discussions:

1. If CDFI Banks wishes to be banks and collect deposits should they be treated any differently from a prudential perspective from other, larger banks. If they wished to serve higher risk communities should they not be required to provide additional capital against that higher level of risk? Should there be a special category for CDFI Banks to support their mission focus? A number of CDFI Banks seem to not be able to articulate their overall competitive strategy in a sharp way or even that of their customers (there were several notable exceptions though). Several of these CDFI Banks seem to be more focussed on “picking up pieces” and helping people “survive” rather than supporting the growth and development of a community that had some real growth prospects. Such banks (that are unable to articulate their strategy) accordingly have:

a. Limited cost advantages allowing them to drive profitability.
b. Have given up on their superior knowledge of their customers allowing them to contain default.
c. Are unable to charge appropriate rates.
d. Have lower profitability that was low to negative despite being for-profit banks.

2. This brought up the whole issue of social return that could be added to the often times low or negative financial returns. While there was a great deal of enthusiasm from the CDFI Banks about this idea the investors that were at a panel (from CITI, Bank of America, TIAA-CREF, and Prudential Financial) were not as enthusiastic. They had the following comments:

a. Social performance was seen as a screen – the financial performance was the quantitative measure and was used to guide actual investment decision making and not social returns.

b. The more sharply the CDFI Bank could distinguish itself from a mainstream bank the more attractive it would be to investors – if it presented itself as just a “better” or more “socially conscious” bank that “works harder” for its clients, it would not be as attractive.

c. More investors preferred debt / deposit instruments that had a guaranteed (even if low) return of both principal and interest to equity investments since exits were few and far between.

Despite all these concerns there was a great deal of enthusiasm about the very high level of importance of the 6,700 community banks (CDFI and non-CDFI) and the role that they were playing in the economy. The NCIF itself is working hard to quantify social returns of CDFI Banks and find other ways to preserve the unique value proposition of these banks, even while diversifying income sources and reducing costs through shared platforms and so on.

There was a presentation from John Hale III, Deputy Associate Administrator of the Office of Capital Access, Small Business Administration (SBA). He was working hard to make the SBA guarantee programme much more attractive to the small banks. There was also a discussion of Treasury guaranteed loan sale / bond sale programme by CDFIs which sounded very much like a securitisation effort.

Within the CDFI community there was much interest in:

1. Better use of technology both in the back-office and in front of the customer.

2. Development of shared service platforms for back-office management. There was a strong sense that such a platform would help reduce costs as well as enhance the operating capabilities of the smaller banks.

There were several CDFIs (such as United Bank from Atmore, Alabama and City First Bank of DC) that had done well and their core strengths seem to be:

1. Deeper knowledge of the customer relative to other banks due primarily to their proximity and continuous presence (some for over 100 years) in the community.

2. Better product designs suited to their customer’s needs which were hard for their competitors to copy.

3. On cost and technology front they did not seem to be at all competitive relative to the bigger banks.

Also amongst the regulators there was a real sense that partnerships between financial institutions were desirable that that, unlike in India, larger banks did not have to do it all “themselves” to fulfil all of their priority sector requirements (which exist even in the US).

By Darshana Rajendran, IFMR Finance Foundation

An asset becomes non-performing when it ceases to generate income for the bank. In India, a Non-Performing Asset (NPA) is broadly defined as one with interest or principal repayment instalment unpaid for more than 90 days.

There exist defined mechanisms to deal with NPAs of banks and financial institutions today. However prior to 1993, banks had to take recourse to the long legal route against defaulting borrowers, beginning with the filing of claims in the courts. A lot of time was therefore spent in the judicial process before banks could have any chance of recovery on their loans. On average, a civil suit decision took anywhere between 5 to 7 years.

Under the Recovery of Debts to Banks and Financial Institutions Act 1993, Debt Recovery Tribunals (DRTs) were set up for recovery of loans of banks and financial institutions. This led to speedy recovery of loans in about 1 year’s time as against the average time of 5 to 7 years required in civil suits. While initially the DRTs performed well, their progress suffered as they got overburdened with the huge volume of cases referred to them.

To speed up the process of recovery from NPAs, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act was enacted in 2002 for regulation of securitization and reconstruction of financial assets and enforcement of security interest by secured creditors. The SARFAESI Act empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. The Act provides three alternative methods for recovery of non-performing assets, namely: -

• Securitisation
• Asset Reconstruction
• Enforcement of Security without intervention of the court

Secured creditors are given the power to take possession of the securities in the event of default and sell such securities for the purpose of recovery of the loan. The Act provides for enforcement of Security interest by a secured creditor without intervention of the court, in cases of default in repayment of instalments and non-compliance with the notice period of 60 days after the declaration of the loan as a non-performing asset.

The Act also provides for setting up of Securitisation Companies/ Reconstruction Companies (SC/RC), which acquire the NPAs from banks and financial institutions by raising funds from Qualified Institutional Buyers (as defined by the Act) by issue of Security Receipts (As defined by the Act) representing undivided interest in such financial assets. The Act enables SC/RCs to take possession of secured assets of the borrowers including right to transfer and realize the secured assets. SC/RCs act as debt aggregators or agents of the banks or financial institutions focused in the resolution of NPAs. The SC/RCs buy the impaired assets from banks and financial institutions, thereby cleaning the balance sheets of the banks and permitting them to focus on their normal banking business.

The promulgation of the SARFAESI Act has been a benchmark reform in the Indian banking sector. The progress under this Act had been significant, as evidenced by the fact that during 2002-03 when the Act came into effect, there was an overall reduction of non-performing loans to 9.4 per cent of gross advances from 14.0 per cent in 1999-2000¹.

Currently, three legal options are available to banks for resolution of NPAs- the SARFAESI Act, Debt Recovery Tribunals and Lok Adalats. The SARFAESI Act has been the most important means for recovery of NPAs. The amount of NPAs recovered under the SARFAESI Act formed over half of the total amount of NPAs recovered in 2009-10. Banks have referred as many as 78,366 loan default cases by end march 2010 under the SARFAESI Act involving a loan amount of Rs. 14, 249 crores. Against this, banks managed to recover Rs. 4,269 crores representing 30% of the loans².

Recently the ‘Report of the Working Group on the Issues and Concerns in the NBFC Sector’ laid out recommendations to extend the coverage of SARFAESI to NBFCs as well. This move will benefit NBFCs, ensuring quicker recovery of their non-performing assets. This, in turn, could encourage NBFCs to provide access to a wider range of financial products and serve better the cause of financial inclusion.

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1 – Reserve Bank of India on Trend and Progress of Banking India 2002-2003
2 – Reserve Bank of India on Trend and Progress of Banking India 2009-2010

This is the second in the series of posts under the topic “Understanding the KGFS Customer”. The author, Sowmya Vedula, of IFMR Rural Finance, presents data regarding KYC documents (both ID and address proof documents) furnished by potential customers when they enrol with KGFS. The author also presents data of existing financial services that customers were already availing at the time of visiting KGFS. The information is as declared by the customer at the time of enrolment or at the time of any periodic data updation.

This blog post displays data of all enrolled members of the three KGFSs, Pudhuaaru (Tamil Nadu), Dhanei (Orissa) and Sahastradhara (Uttarakhand), obtained from the datasets of the Customer Management System (CMS).

Note:
•    Data considered for this post is as of September 20th 2011
•    The enrolment statistics for the three KGFSs is: Pudhuaaru – 126,082; Dhanei – 24,793; Sahastradhara – 18,404; Total=169,279

ID Proof Documents

ID proof documents are collected from customers during enrolment with KGFS. Voter ID is the most commonly submitted ID proof document across the three geographies. The major document in the ‘Others’ category for Pudhuaaru and Dhanei are driving licence, bank passbook, PAN card and passport, while for Sahastradhara it is driving licence, PAN Card and passport.

The ‘Panchayat Certificate’ category comprises of letters obtained from a gazetted officer or the Panchayat Head or the Village Admin officer (VAO). Slightly more than 10% of all enrolments in Pudhuaaru and Dhanei used this category of ID proof. In Pudhuaaru, 72% of these enrolments were by females while in Dhanei, females in this category formed only 41%. A major portion of these enrolled customers were labourers or housewives.

PAN Card

PAN card (Permanent Account Number issued by the Income Tax Department) applications had been facilitated by the KGFS branches for its customers up to March 2010.

Address Proof Documents

The break-up of the document types collected as address proof are given above. The major document types in the ‘Others’ category for Pudhuaaru and Dhanei are driving licence, bank passbook and passport, while for Sahastradhara it is driving licence and passport.

Other financial services

The above charts give information about other financial services being availed by the KGFS Customer – bank account and other loans. The breakup of the source of the loans is given in the panel on the right.