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RBI panel on household finances suggests simpler financial products

LiveMint logoLiveMint 24-08-2017 Gopika Gopakumar

Mumbai: A Reserve Bank of India (RBI) constituted panel on household finances has recommended that households be given a suite of simple, customized, financial products with a default opt-out structure to further their participation in formal financial markets.

The panel, headed by Tarun Ramadorai, professor of financial economics at the University of Oxford, also made sector specific recommendations, providing integrated financial advice for households and leveraging technology to reduce transaction costs.

For instance, in the credit markets, the panel suggested that banks should quote loans to customers using RBI’s repo rate (repurchase rate, its key policy rate) rather than based on their own marginal cost of funds-based lending rate (MCLR) to help comparisons. It further recommended that all banks use the same period for resetting floating loan rates, which should be one month.

It has suggested that households be allowed the choice to shop for the best annuity plans and investment guidelines for annuity funds to be relaxed. Further, it has proposed investigating whether raising the cap on management fees will boost the national pension system.

In insurance, it has proposed simplified low-cost home and contents insurance and travel insurance. It further said that low-cost catastrophe insurance could perhaps be made mandatory when purchasing property in areas that are at a high risk of natural disasters.

Such simplified products also tie in with the panel’s advice of ensuring an essential minimum financial kit for households when they access any one and finish KYC (know your customer) compliance. This means that when households open say, a no-frills banking account, they will automatically get access to simple term insurance, basic health insurance, micro unsecured credit, simple collaterized loans, flexible fixed deposit accounts, etc.

The panel has proposed a uniform set of standards and definition for consumer protection and providing integrated financial advice to households. These rules will apply regardless of the specific product or function to which the advice pertains, the report said. The committee has proposed that advice and sales of financial products be separated, supported by a fiduciary standard. It said it believed that technology such as Robo advice can bring down costs.

In general, it has pushed for embracing technology to cut transaction costs such as using electronic forms for KYC compliance.

In that context, it has also called for a so-called regulatory sandbox for trying out new innovations.

A regulatory sandbox is a safe space which allows the regulator to conduct field tests to collect evidence on new financial innovations, while carefully monitoring their risks, it said.

The panel noted that if current patterns of asset allocation —mainly to physical assets—are maintained, there will be significant additional pressure on the demand for gold and real estate in the coming decades. Households appear to be vulnerable to adverse shocks later in life because of low penetration of insurance and private pension plans.

If the median household shifts from non-institutional debt to institutional debt, it can lead to gains equivalent to between 1.9-4.2% of annual income, it said by way of illustration.

The committee, which had members from all financial sector regulators was formed to look at the various facets of household finance in India and to benchmark India’s position vis-à-vis both the peer countries and advanced countries.

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