RBI committee suggests direct cash transfer, eliminating farm subsidy

29 Dec 2015 Evaluate

The Reserve Bank of India (RBI) committee on medium-term path on financial inclusion, headed by RBI executive director Deepak Mohanty, has recommended that the government should transfer cash directly to persons instead of giving subsidies, and should replace interest subvention on agriculture loans with affordable universal crop insurance scheme. The group opined that the most efficient way for an effective financial inclusion is direct cash transfer which can be tried to address problems in the irrigation sector and instead of charging “abnormally low electricity tariffs” for agricultural use, equivalent cash can be transferred into beneficiaries’ accounts.

The committee which was set up in mid-July also recommended that linking credit accounts with unique identification number, or Aadhaar number, and share information with credit information companies to enhance stability of the credit system and improve access. Currently, the government gives interest rate subvention of two per cent for short-term crop loans of up to Rs 3 lakh. Another three per cent subvention for prompt repayment lowers the effective cost further. Payments towards such subvention have increased rapidly over time. From less than Rs 2,500 crore in subvention in 2006, government’s subvention in 2016 is projected to be above Rs 12,500 crore. Further, the committee recommended that a mandatory crop insurance scheme covering all crops should be introduced starting with small and marginal farmers with a monetary ceiling of Rs 2 lakh. Farmers will have to pay a nominal premium to get this insurance and the balance could come from government subsidy. Heavy use of technology, like satellite images for crop mapping and assess damage, could make the insurance scheme more efficient.

Among other major recommendations, the panel suggested stepping up efforts to include more women in the financial inclusion fold. The All-India Debt and Investment Survey (AIDIS) suggested that interest rates paid by female household head are, on average, higher than those paid by male household heads. In order to include more women, and with the government’s emphasis on the welfare of girl child, the panel recommended that a new welfare scheme, called Sukanya Shiksha that can be jointly funded by the central and state governments, be formed. As per the Mohanty report, the mobile phones are the way forward for inclusion. Public sector banks account for only 14 per cent of the total mobile banking transactions worth Rs 270 billion, suggesting there is significant room for market players to grow. Besides, an eco-system should be developed where full-service banks, regional banks, non-banking finance companies, semi-formal financial institutions, as well as the newly-licensed payments banks and small finance banks, could work together for effective inclusion.

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