Various studies have revealed that consumption is usually much less volatile than income, indicating a fair pattern of inter-temporal savings, even amongst the poorest households. But despite this active level of financial management, these households have no recourse to formal financial systems. Policymakers in India have recognised that improving current systems and designing new, innovative systems to reach the poor will require radical improvements in cost efficiency and an associated change in the existing set of regulations. The RBI has in recent years put in place several regulations to encourage financial inclusion by granting greater freedom to the concerned players while simultaneously seeking to protect the interests of the target populations. While many of its regulations have created an enabling environment for inclusion, some, understandably, have limited the progress that could have been made. This is an outcome of the ‘Regulator’s Dilemma’, a term coined by David Porteous: How can regulators balance their need to promote broader access to financial services with ensuring the stability of the financial system? This is a fine balancing act, failure to achieve it could lead to the choking of incipient attempts at providing universal access or financial destabilisation and the bankruptcy of the vulnerable. Changing Transaction Nature Ultimately, regulations have to be designed keeping in mind the risks involved. The risks will vary with the model adopted, whether the model is transformational or additive to banking. In addition, regulatory coordination will have to be achieved amongst the respective regulators to ensure they are not working at cross purposes. Since the current regulations touch upon the participatory capacities of players across all the concerned sectors, this discussion is segmented according to the regulations applicable to each sector. Which sectors are expected to play a leading role in expanding financial inclusion? Banks and mobile operators will be in the spotlight, along with any other companies that may partake in the business correspondent (BC) model. The chief regulators to walk the tightrope, then, are the RBI, TRAI and to a limited extent, the Competition Commission of India. BANKS Many people shun banking due to the prohibitively high minimum account balances and transaction charges. One of the first steps to promote inclusion was thus aimed at making accounts universally affordable and accessible. The RBI directive in 2005-06 permitted banks to open zero-balance, no-frills accounts. Know-your-customer (KYC) norms were also relaxed for people with account balances of less than Rs 50,000 and whose total credit would not exceed Rs 100,000. In all other instances, KYC norms are quite strict and seek to prevent money laundering and terror financing (often called AML/CFT). However, in effect KYC was hindering inclusion as the financially excluded often either live in temporary homes or lack the requisite documentation. The rapid expansion of card-based payments systems was also noted by the RBI. It has traditionally been wary of deregulating the payments space, especially in the case of electronic channels. The 2007 Payment and Settlement Systems Act provided for the regulation and supervision of payment systems such as card-based ones and designated the RBI as the authority for that purpose. The 2008 Rangarajan Committee on financial inclusion recommended that each branch of PSU banks should open at least 250 new accounts each year, or a total of 12.5 million new accounts a year. According to C Rangarajan, “Access to finance by the poor and vulnerable groups is a pre-requisite for poverty reduction and social cohesion. This is a modest target, which banks can achieve easily.” Then in December 2009, the RBI stated that money transfers up to Rs 5,000 could be conducted without a recipient account, i.e. an account-to-cash transfer, facilitated through ATMs or BCs. This di

1. Source: Financial Express, 20th February, 2011