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Following several complaints and reports by Moneylife, the Reserve Bank is understood to have directed Prof Dr Anil Pandya to step down as executive chairman of High Mark, the troubled and cash strapped credit bureau
Reserve Bank of India (RBI) is understood to have asked Prof Dr Anil Pandya to step down as executive chairman of troubled and cash strapped credit bureau High Mark Credit Information Services Pvt Ltd. Subsequently, Prof Dr Pandya has reportedly resigned from High Mark after the Board meeting and gone back to the US. Prof Dr Pandya was a tenured full professor at the College of Business, Northeastern Illinois University in Chicago, and an adjunct professor at Northwestern University Kellogg Graduate School of Management, according to High Mark's website.
Our mail sent to High Mark remained unanswered till writing the story. We would incorporate their response as and when we receive it.
In response to a Right to Information (RTI) application, the central bank had said, “Following complaints and adverse reports in media (mainly Moneylife) the RBI conducted an inspection of High Mark during May 2013.”
Earlier in August, the Central Vigilance Commission (CVC) has sought a factual report from the chief vigilance officer (CVO) of RBI in granting licence to High Mark.
This follows complaints from former executives of High Mark over the appointment of Prof Dr Pandya. They claimed while appointing Prof Dr Pandya, High Mark has violated Credit Information Companies Regulations (CICR) Act, 2005 (CICRA) as well as Companies Act.
While High Mark never appointed Prof Dr Pandya on a whole-time basis, he was able to continue teaching in the US as well was working with the credit bureau on a part-time basis. As per the CICR Act, when a credit bureau appoints chairman on a part-time basis, it then must have a managing director or full-time director to look after the management and affairs of the bureau.
Prof Dr Pandya has an employment contract with High Mark under which he was to devote his full time for the services of the company and was paid a salary of Rs60 lakh per annum. "However, over and above this, he was also entitled to a huge sum of money (Rs12.5 million or about $230,000) towards 'procurement of the in–principle license from RBI' (clause 4(b). Further payment of Rs30.25 million (around $560,000) was also made to him under clause 4(c)," said one of the executives who worked at High Mark.
High Mark, the only bureau started by individuals, has been under severe financial stress following the exit of several of its top managers and the failure of its rights issue. According to sources, the company has almost run through the Rs43 crore, it raised and was about to cease operations in couple of months, unless it finds a new investor. Last year, the credit bureau was negotiating with Italy-based credit bureau CRIF SpA for a bailout. High Mark was offered Rs30 per share by CRIF, which owns 9.09% stake in the Indian credit bureau. However, RBI rejected the proposal because of its reservations about CRIF’s ownership pattern.
Experian Credit Information Company of India Pvt Ltd (Experian India), one of the four credit information companies (CICs) in India, was in talks with High Mark and reportedly had also completed the due diligence process. According to the sources, Experian has increased its bid to Rs27 from Rs25 to buy minimum 26% stake in troubled and cash-strapped High Mark.
As Moneylife has been pointing out there is a dire need to have checks and balances in the quality of technology or data-matching algorithms used by credit bureaus in India. In addition, there is need to have proper redressal process for users, especially when these systems fail.
According to sources, the Reserve Bank has initiated an inspection of Credit Information Bureau (India) Ltd (CIBIL), following several complaints and media reports.
At Moneylife’s ‘Open House’ with RBI deputy governor Dr KC Chakrabarty on 3 June 2013, an angry customer stood up to complain about CIBIL, which practically enjoys a monopoly of the credit bureau business. On 4th June, we received an angry letter from one Umesh Dhawan whose Rs5-lakh loan was rejected because he was shown as a defaulter by CIBIL. He was under the impression that his banker had reported him. But we discovered that the problem was far worse. CIBIL apparently used its own algorithm to match data and ended up mixing his data with that of another person called Umesh Uhawan.
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According to Dr KC Chakrabarty, deputy governor, the central bank is considering making bank licensing more frequent to accommodate more banks
In order to expand the reach of banking, the Reserve Bank of India (RBI) is considering making the bank licensing process more frequent and allow free entry of banks as and when necessary.
“We propose to carry forward these ideas and come up with a detailed road map of necessary reform and regulations for free entry and making the licensing process more frequent after we get comments from the stakeholders,” said Dr KC Chakrabarty, deputy governor of RBI in New Delhi.
RBI is in the process of issuing new bank licences consistent with the highest standards of transparency and diligence. RBI has already come out with a discussion paper on the banking sector in India, on which the regulator has invited comments from stakeholders.
“The document explores the possibility of a differentiated licence for small banks and wholesale banks, the possibility of continuous on-tap licensing and the possibility of converting large urban co-operative banks into commercial banks,” he said.
Currently the central bank is in the process of issuing new bank licences for which it has received applications from 26 entities including public and private sector. The RBI is likely to issue the licences by January 2014.
The apex bank has already set up an external committee of financial sector experts, headed by former RBI Governor Bimal Jalan, to scrutinise the applications.
“With a view to ensuring that the banking system grows in size to meet the needs of a modern economy and improve access to banking services, the RBI is considering giving some additional banking licences to private sector players subject to their meeting our eligibility criteria,” Dr Chakrabarty said.
He further said the regulator is encouraging foreign banks to adopt the wholly-owned subsidiary model to carry out business in the country.
“We have more than 44 foreign banks in the country and at least three of them are more than 100 years old ... RBI will encourage qualifying foreign banks to move to a wholly-owned subsidiary structure that will enjoy near national treatment,” Chakrabarty said.
He further said the banking system is well capitalised. “Profitability is reasonable, return on equity is reasonable, NPA is under control and it meets with all global standards of regulation for business,” he added.
He said the Indian economy is facing challenges of high inflation, slow growth and investment, the current account deficit (CAD) is above sustainable levels and fiscal deficit high.
“It is the intent and objective of the Government to attract and promote foreign direct investment in order to supplement domestic capital, technology and skill for accelerated economic growth,” he said.
Interestingly, the time frame of the RBI financial inclusion committee seems to run almost parallel to that of the banking selection advisory panel. This is a very serious issue. I am not sure that this is good practice in terms of governance and especially, at one of India’s key institutions
‘Oh I get by with a little help from my friends’ – The Beatles
It has become commonplace to see a new committee announced by the Reserve Bank of India (RBI), every other day. The latest in this trend is the banking license advisory panel that was announced on Friday. As the RBI press release notes,
“Dr Rajan announced the names of other members of the committee set up by the Reserve Bank to advise it on new bank licences. These were: Smt. Usha Thorat, former Deputy Governor, Reserve Bank of India, Shri Chandrakant Bhave, former Chairman, Securities and Exchange Board of India (SEBI) and Shri Nachiket M. Mor, Director, Central Board of Directors, RBI. As earlier announced, the Committee would be headed by Dr Bimal Jalan, former Governor Reserve Bank of India.”
As I was reading this, I came across an interesting news item , on The Hindu, dated 27th September 2013, which said that:
“The Parliamentary Standing Committee on Finance ... finalised its report on the new bank licences at its meeting here. According to sources, most of the members opposed giving bank licences to corporate houses and the same concerns have been reflected in the report which will be submitted to Lok Sabha Speaker Meira Kumar soon. ... The members also objected the fit and proper criteria, saying it was discriminatory as it gave RBI discretionary powers to accept or reject an application based on certain undefined parameters.... The members insisted that the guidelines issued in 2001, should be the basis for issuing new bank licences.”
Two questions sprang to my mind. Why has there been a rush by the RBI to form a committee to grant banking licenses when the Parliamentary Standing Committee on Finance (PSCF) is looking at the same subject? Why not wait for the report to be submitted to the Speaker and then have the Parliament debate the same, before deciding on the new bank licenses? Why is there an attempt (RBI’s New Financial Inclusion Committee: Bypassing the Parliament?) to undermine the highest authority of our land, the Parliament?
The above issue notwithstanding, two committees (The New Financial Inclusion Committee and the Banking License Advisory Panel) announced recently by the RBI seem to have confirmed the fears of the PSCF in terms of too much discretionary powers being vested with and used by the RBI.
Readers would recall a recent Moneylife article (RBI’s New Financial Inclusion Committee: Rife with conflicts of interests) highlighted two different levels of conflicts of interests in the newly appointed financial inclusion committee. I had pointed out that while Dr Raghuram Rajan is trying to give out banking licences in a fair and transparent manner, several members of the newly appointed financial inclusion committee are associated with groups looking to get a banking licence. The institutions that some of the committee members are associated with are also focusing on the micro-finance/financial inclusion segment for their commercial interests, creating more potential conflicts of interest
Now, on Friday, October 4th, after the RBI revealed three other members of the Bank License Advisory Panel, these conflicts of interests have become even more serious as evident from the discussion below.
Dr Nachiket Mor, a member of the newly announced banking license selection advisory panel, also happens to be the head of the recently constituted RBI financial inclusion (FI) committee. As chair of this RBI financial inclusion committee, Dr Mor has on-going working relationships with several individual committee members who have direct linkages with institutions (Janalakshmi, Bandhan, J M Financial with Mr Vikram Pandit) that have applied for the banking license. And interestingly, the time frame of the RBI financial inclusion committee seems to run almost parallel to that of the banking selection advisory panel. This is a very serious issue. I am not sure that this is good practice in terms of governance and especially, at one of India’s key institutions.
As they often say, the devil is in the details. Let us therefore look at the members of both of the above RBI committees and examine their inter-relationships:
Several critical points emanate from the above.
First, as evident from the above, it is clear that many members[i] of the RBI financial inclusion committee – Dr Nachiket Mor, Ms Bindu Anath, Ms Rama Bijapurkar, Ms Roopa Kudva, Mrs Shika Sharma, Mr Bharat Doshi, Mr Ramesh Ramanathan, and Mr Vikram Pandit – have close inter-linkages amongst themselves, both as individuals and through organisations that they serve as independent directors and/or otherwise represent
Second, some of them (Mr Ramesh Ramanathan, Mr Vikram Pandit, Ms Rama Bijapurkar) represent institutions that have applied for the banking license directly
Third, others (Ms Bindu Anath, Ms Roopa Kudva, Mrs Shika Sharma) represent organisations that are directly involved with institutions that have applied directly for a banking license. They also work very closely with the financial inclusion and micro-finance sector
Fourth, it is also clear that all of the above members of the financial inclusion committee would be working very closely with Dr Nachiket Mor in his capacity as Chair of the same committee. However, what should not be forgotten is the fact that Dr Mor is also a part of the banking license advisory panel, whose time frame, as noted earlier, more or less, coincides with that of the financial inclusion committee. This, in my opinion, again constitutes a serious conflict of interest.
One another factor exacerbates the conflicts of interests and indeed, it has very significant ramifications for the whole process of governance with regard to new bank licensing. Dr Nachiket Mor is also a member of the central board of RBI which means that he will have an impact in terms of choosing the bank licensees in two places – first at the level of the banking license advisory panel and later, at the level of the RBI central board. Please recall Dr Rajan’s inaugural speech which states the process for determination of banking licenses:
“We are in the process of constituting an external committee. Dr. Bimal Jalan, an illustrious former governor, has agreed to chair it, and the committee will be composed of individuals with impeccable reputation. This committee will screen licence applicants after an initial compilation of applications by the RBI staff. The external committee will make recommendations to the RBI governor and deputy governors, and we will propose the final slate to the Committee of the RBI Central Board.”
Thus, given the above, I have no hesitation in stating that the banking license selection process has been rendered arbitrary and huge conflicts of interest have entered the fray. Thus, the concerns of the Hon PSCF, are indeed genuine and they must be addressed. All of these need to be seriously looked at by all concerned –Hon Chair, Parliamentary Standing Committee on Finance, Hon Speaker of The Lok Sabha and several other stakeholders including the Hon Prime Minister and Hon Finance Minister!
iI would like to make it absolutely clear that I have greatest regard for many of these professionals including Dr Nachiket Mor. What I am questioning is the process of governance at RBI in giving out banking licenses and as well as in establishing the regulatory framework for financial inclusion in India, which is to have an impact on very large numbers of low income people.
(Ramesh S 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.)