With the ongoing bids for becoming BCs approaching near zero percent, the boards of the banks should be made responsible for any outsourcing done by their respective banks through the common BC
The ongoing bids for becoming bank business correspondent (BC) in 20 clusters across India is getting to be more interesting with Vakrangee supposedly having won the bid for being the common BC for Rajasthan and Delhi at 0.02%. From the time Vakrangee bid and won the Maharashtra common BC bid at 0.48% to their recent successful bid at 0.02% (for Rajasthan/Delhi), they have not been alone. Fino’s and Strategic Outsourcing Services have bid 0.35%/0.19% and 0.11% respectively to be selected as common BC for Jharkhand/Chhattisgarh and Orissa.
What are the implications of very low cost BC bids that are now beginning to approach near zero percent? Can BCs really deliver at such cost levels? Are there any resultant concerns with regard to delivery of quality financial inclusion services through BCs? What should the regulators do in the present circumstances?
While questions such as these are very legitimate ones and need to be answered transparently, I personally think that banks must be held responsible for the success/failure of the BC model, whichever happens over time. When the microfinance crisis happened in Andhra Pradesh in 2010, DFIs (like SIDBI) and commercial banks feigned complete ignorance over issues like presence of broker agents, multiple lending, sharing of clients/JLGs, ghost clients and other frauds, etc. I simply fail to understand how DFIs and banks, who were supposedly undertaking due diligence visits to the MFIs (microfinance institutions) and their field areas (during and after disbursement of every tranche of loans to MFIs), could not spot these happenings over a two to four year period. And conveniently, many banks claimed that the crisis happened because the MFI promoters were perhaps pushed hard by the equity investors—but the irony of the matter is that the 2010 microfinance crisis in Andhra Pradesh would not have occurred but for the banks pumping huge sums of priority sector loans to the MFIs. Let us make no mistake about that!
Therefore, lest history repeat itself, I strongly feel that with the BC model, the board of directors of the various banks should be made (wholly) responsible for any outsourcing done by their respective banks through the common BC. And that is where the buck has to stop.
OK what does this mean in terms of tangible actions?
First, on its part, the Reserve Bank of India (RBI) must ensure that bank boards have a clear policy framework—with regard to outsourcing through BCs—that can be implemented in real time. And it is not a “cut and paste” policy document that I am talking about. I am referring to an outsourcing policy, with regard to BCs (and their sub-agents), where respective bank boards have thoroughly debated the pros and cons of various activities (to be outsourced) after understanding the attendant risks and benefits.
Second, the policy must clearly specify as to how the outsourcing through BC (and their sub-agents) will be overseen effectively by the bank. And without question, such an appropriate governance structure with properly defined roles and responsibilities on the part of the outsourcing bank should exist (in real time) as specified in the policy.
Third—given that it is the bank’s board of directors which has the overall responsibility for ensuring that all ongoing outsourcing decisions taken by the bank, and activities undertaken by the BC (and their sub-agents) are in keeping with its outsourcing policy as well as extant laws—the policy must clearly and unequivocally specify the role of internal audit in helping to achieve the above objective.
Fourth, the policy must specify appropriate (fall-back) measures/safeguards so as to deal with any situation (like the 2010 Andhra Pradesh MFI crisis) when the bank’s ability to comply with legal and regulatory requirements may be diminished in any serious manner.
In terms of specific issues, the board of directors of the respective banks should:
a. Review and approve the outsourcing policy of the bank with regard to BCs (and their sub-agents) and the risk-management policies (for such outsourcing) as recommended by senior management. This will also include approving the framework to evaluate the risks and materiality of all existing and prospective outsourcing to BCs (and their sub-agents) and the specific policies that apply to such arrangements.
b. Review periodically, but at least semi-annually, management reports demonstrating extent of compliance with the approved risk-management policies for outsourcing (to BCs and their sub-agents);
c. Approve any outsourcing arrangement with BCs (and their sub-agents) that exceeds the level of authority delegated to management;
d. Review periodically the content and frequency of management’s ‘status of BC outsourcing’ reports (prepared for the board).
e. Create a special board sub-committee with regard to outsourcing to BCs (and their sub-agents). Among other things, this sub-committee should ensure that:
• People responsible for administering the risk-management policies for outsourcing to BCs (and their sub-agents) possess the quality and competency required;
• The (internal) audit function regularly reviews operations to assess whether or not the risk-management policies and procedures for outsourcing to BCs (and their sub-agents) are being followed and to confirm that sufficient risk-management processes are in place;
• The periodic performance review of outsourced functions to BCs (and their sub-agents) also includes assessment of: i) the fact that the BC and their sub-agents (have complied with and) remain capable of complying with all the extant legal and regulatory requirements in the future as well; and ii) the continued relevance, and safety and soundness of the outsourcing to the BCs and their sub-agents; and
• The bank will not, in any way, be impaired in its ability to supervise the BC (and its sub-agents) at any point in time—both now and in the future.
To summarise, what is required is an outsourcing policy over which the bank boards have complete ownership. This is especially critical given that in the present scenario, some large public sector banks have expressed their lack of familiarity with regard to outsourcing to business correspondents (and their sub-agents). Therefore, even if the RFPs are ongoing, it still makes immense sense for the concerned banks to go through a proper process and develop a clear policy framework that guides outsourcing through business correspondents. And without question, it is the board (of the bank) that must have ownership over the policy and complete responsibility for its implementation. And the policy and its implementation in real time must be consistently evaluated in the light of what happened in Indian micro-finance in 2010. Without any doubt, we must learn from the 2010 Andhra Pradesh micro-finance and other crisis situations and make banks fully responsible and accountable for their actions/activities and outsourcing to BCs is no exception. And who better than the bank boards to do this in real time?
Ramesh Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)
Strong close below today’s low of 5,106 on the Nifty may result in a change in uptrend which started from 4,771on 4th June
The market erased all its gains and settled in the negative as the government's initiatives to boost growth did not meet market expectations. We may now see the uptrend weakening. Tomorrow if there is strong close below today's low of 5,106, we may see a change in the trend. The National Stock Exchange (NSE) saw a volume of 56.86 crore shares.
The market opened on a firm note ahead of the announcement of fresh initiatives to curb the rupee slide after the Indian currency hit a historic low of 57.32 against the dollar on Friday. Meanwhile, markets in Asia were mostly lower in morning trade on concerns about the pace of the global economic growth and unending woes in Europe.
Back home, the Nifty opened 13 points higher at 5,159 and the Sensex added 66 points to its previous close and started off today's trade at 17,039. Banking, metal, auto and capital goods stocks supported the early gains.
Meanwhile, the rupee was trading 71 paise higher at 56.44 against the dollar following a sharp recovery on fresh selling of the American currency by banks ahead of expected measures from the government to arrest the rupee's decline.
In another development, Ratings agency Moody's today retained the outlook on India's rating at stable despite a slowdown in gross domestic product (GDP) growth rate saying that it is unlikely to be even a medium-term feature. Moody's decision comes against the backdrop of two other leading agencies-Standard and Poor's and Fitch lowering the credit rating outlook to negative.
Trading in a narrow range, the indices crawled to their intraday high in late morning trade. At the highs, the Nifty rose to 5,195 and the Sensex went up to 17,131. Profit booking at the highs saw the benchmarks paring part of the gains, but they were still in the positive terrain.
The domestic market dipped further in noon trade as the key European indices opened in the red as investors were wary of any new announcements from the European Union leaders, who are meeting later this week to discuss possible solutions to end the lingering debt crisis.
The indices drifted further southwards and into the negative in the post noon session on a fall in the rupee and the measures announced by the government to push economic growth did not meet the street's expectations.
The market touched its intraday low at shortly after 3.00pm with the Nifty falling to 5,106 and the Sensex retracting itself to 16,853.
Although the market closed in the red for the second straight day, the indices were off the lows. The Nifty closed 31 points lower at 5,115 and the Sensex fell by 90 points to settle below the psychological level of 17,000 at 16,882.
Markets in Asia closed lower on concerns over slowing growth in key economies like China and the US and the worsening debt situation in Europe.
The Shanghai Composite tanked 1.63%; the Hang Seng declined 0.51%; the Jakarta Composite fell by 0.82%; the Nikkei 225 fell by 0.72%; the Straits Times lost 0.45%; the KOSPI Composite dropped 1.19% and the Taiwan Weighted settled 0.77% lower. On the other hand, the KLSE Composite ended flat at 1,603.
At the time of writing, the key European indices were down between 0.70% and 1.67% as Spain officially sought financial aid from its Eurozone partners to boost its banking system. US stock futures were also in the negative following the latest news from Spain.
Back home, institutional investors were net sellers in the equities segment on Friday. While foreign institutional investors pulled out funds totalling Rs174.22 crore, domestic institutional investors withdrew Rs1.27 crore from stocks on Friday.
The maximum retail price is supposed to make consumers better off. However, we learn that using fine prints of the law, retailers are selling above MRP and getting away
The laws related to maximum retail price (MRP) have been carelessly drafted that even shops which sell above MRP cannot be punished. It would seem that legal experts and bureaucrats who draft legislations are ignorant of the basics. More pertinently, it would seem that not printing the MRP on a packaged commodity would attract punishment, but selling above MRP would be allowed! Most people believe that the MRP printed on packaged commodities is beneficial to the consumers, as they cannot be sold above the MRP. It prevents exploitation of consumers. However, defective drafting of the laws has made MRP a meaningless number.
A recent judgment by the National Consumer Commission (NCC) has upheld the order of Bharuch (Gujarat) District Forum imposing a fine on Hotel Nyay Mandir for charging more than the MRP on some soft drinks. In another case, the Delhi State Consumer Commission imposed huge punitive damages of Rs50,000 on a restaurant serving mineral water to its customers at three times the MRP. While these decisions are welcome from the point of view of the consumer, unfortunately it goes against an order of the Supreme Court and is liable to be struck down.
The Supreme Court order (State of Himachal Pradesh Vs Associated Hotels of India, AIR 1972 SC 1131) given in 1972 makes MRP applicable only to retail sales, i.e. goods sold in shops. The Supreme Court held that such food and drinks can not be considered retail sales since they are always accompanied by service. So food and drinks consumed in hotels, restaurants or airplanes may be sold at prices above the MRP. However, it is different for shops, kirana stores, etc. They could charge more than MRP and still get away with it! Let us explore how and why.
The Standards of Weights and Measures Act, 1976, (the Act) only mandates that the price be printed on the package whereas the Standards of Weights and Measures (Packaged Commodities) Rules, 1977 (the Rules) go impermissibly further by stipulating that price charged can not exceed the printed price. The Act always supersedes the rules, and thus the latter would not have any bearing on the former, no matter how sensible or valid. The Act does not forbid selling packaged commodities for a price higher than the printed price much less specify the penalty for selling above the printed price.
According to the Section 39 of The Act, “No person shall—
(a) make, manufacture, pack, sell, or cause to be packed or sold; or
(b) distribute, deliver, or cause to be distributed or delivered; or
(c) offer, expose or possess for sale, any commodity in packaged form
to which this Part applies unless such package bears thereon or a label securely attached thereto a definite, plain and conspicuous declaration, as prescribed, of –
(i) the identity of the commodity in the package;
(ii) the net quantity, in terms of the standard unit of weight or measure, or the commodity in the package; (iii) where the commodity is packaged or sold by number, the accurate number of the commodity contained in the package;
(iv) the Unit sale price of the package;
(v) the sale price of the package.”
According to Section 23(2) of the rules, the retail sale of any packaged commodity at a price higher than the printed MRP is prohibited. It says, “No dealer or other person including manufacturer, packer, and wholesale dealer shall make any sale of any commodity in packed form at a price exceeding the retail sale price thereof.”
Thus it is clear that while the rules state that anything cannot be sold above MRP, sadly it cannot be enforced since the Act supersedes rules. Violation of the Act, I an MRP, would attract a fine of Rs5,000 or a prison term of five years with a fine. Section 63 of the Act states, “Whoever, in the course of inter-state trade or commerce, sells, distributes, delivers or otherwise transfers, or causes to be sold, distributed , delivered or otherwise transferred any commodity in a packaged form which does not conform to the provisions of this Act or any rule made there under, shall be punished with fine which may extend to Rs5,000, and, for the second or subsequent offence, with imprisonment for a term which may extend to five years and also with fine.”
One would expect that legal experts and bureaucrats would notice this and make the change accordingly. However, it seems they haven’t learnt anything and have just simply drafted a new act and rules without bothering to take cognizance of this glaring loophole.
The central government enacted the Legal Metrology Act 2009 (the New Act), which came into force on 1 April 2011 and replaced The Standards of Weights and Measures Act, 1976. The new act rationalizes the units for measurement to be used in India. The Act also specifies the metric system (metre, kilogram, etc.) to be used. It regulates the manufacture, sale and use of standard weights and measures.
According to Chapter V, of the Legal Metrology Act 2009, it appears that the non-conformity refers only to weight, number, etc. and not to the price. So there is no explicit prohibition of sale above the MRP. Several sections in this chapter devote to ‘weight’ or ‘number’ but not price. The only difference in this Act is the quantum of fine is much higher, at Rs25,000 instead of Rs5,000. Section 36 of the Legal Metrology Act states, “Whoever manufactures, packs, imports, sells, distributes, delivers or otherwise transfers, offers, exposes or possesses for sale, or causes to be sold, distributed, delivered or otherwise transferred, offered, exposed for sale any pre-packaged commodity which does not conform to the declarations on the package as provided in this Act, shall be punished with fine which may extend to twenty-five thousand rupees, for the second offence, with fine which may extend to Rs50,000 and for the subsequent offence, with fine which shall not be less than Rs50,000 but which may extend to Rs1 lakh or with imprisonment for a term which may extend to one year or with both.”
Similarly, according to Section 18(2) of The Legal Metrology (Packaged Commodities) Rules, 2011 (which replaced the Standards of Weights and Measures (Packaged Commodities Rules, 1977), it states that, “No retail dealer or other person including manufacturer, packer, importer and wholesale dealer shall make any sale of any commodity in packed form at a price exceeding the retail sale price thereof.”
Basically, the old and the new acts and rules are the more or less the same! It would seem that MRP is just a fiction. Anybody would be able to sell it above MRP.
In fact, there are several Supreme Court orders which prescribe the limits of rules made under an Act. They all say that Rules cannot extend the boundaries of the Act under which they have been made (e.g. Bharathidasan University Vs All-India Council for Technical Education, (2001) 8 SCC 767). They should have included the prohibition of charging a price higher than the printed price in the Act itself and not just in the rules. Unless parliament fixes this lacuna, MRP will continue to remain a paper tiger and not benefit any consumer.