There was no surprise in the Reserve Bank of India’s (RBI) discussion paper on entry of new banks, released last week. It has refrained from taking any position on critical issues such as who should be given a licence or how much money one needs to bring in to set up a bank, asking various stakeholders to come up with suggestions by 30 September. Based on the feedback, RBI will formulate the guidelines. In that sense, it’s the most open-ended discussion paper ever put up on RBI’s website. The reason behind such a passive discussion could be the Indian central bank’s initial reluctance to allow more banks to come in.
Finance minister Pranab Mukherjee, in his February Budget, “was happy to inform the honourable members (of Parliament) that RBI is considering giving some additional banking licences to private sector players”.
Also Read Tamal Bandyopadhyay’s earlier columns
In reality, RBI was not in favour of allowing new banks. This also explains why it took five months to come out with this discussion paper.
In 1993, when RBI issued licences to the first set of 10 new banks, the objective was to infuse competition. This time around, the objective is different—spread of banking services or financial inclusion. If that’s indeed the case, why it wants to issue licences to a “limited number of new banks” is a mystery. Around 50% of Indians do not have access to banking services. So, arithmetically, we need to double the number of banks that are now operating. If that sounds too simplistic, we definitely need a dozen banks or more.
In 1969, when the government nationalized commercial banks run by industrial houses and shifted the focus from class banking to mass banking, there were 8,262 branches across the nation. This number has grown at least ninefold to around 78,000 now. But the population covered by a single bank branch has not come down to that extent. In 1969, one branch used to cater to 64,000 people. Now, the corresponding figure is 13,400. Also, there is clearly uneven distribution of bank branches. Which is why in urban India 9,400 people are covered by one branch, but in semi-urban and rural India, one branch covers 15,900 people.
Overall, the population covered by each branch has come down and the total number of check-in accounts held at commercial banks, regional rural banks, primary agricultural credit societies, urban cooperative banks and post offices have risen. Still, very few people in the low-income bracket have access to formal banking channels. Only 34% of people with annual earnings of less than Rs50,000 in urban India had a bank account in 2007. The comparative figure in rural India is even lower, 26.8%. Also, only 5.2% of India’s 650,000 villages have bank branches even though about 39% of the overall bank branch network is in rural India.
So, no one would dispute the fact that India needs more banks. The debate is on who would set up these banks. Will big industrial houses be allowed entry in banking or should we stick to financial institutions, non-banking finance firms, and finance professionals? Only three of the 10 banks that were given licences in early 1990s have flourished and all three were promoted by institutions. There aren’t too many institutions around that can set up banks. Life Insurance Corp. of India cannot get into any lending business under the Insurance Act (its home finance firm can) and IFCI Ltd is a failed institution.
The experience with individual finance professionals running banks has been nothing to write home about. That leaves us with big industrial houses and non-banking finance companies or NBFCs. In some sense, they are connected as many successful NBFCs are promoted by big industrial houses. Barring the US, most developed nations allow industrial houses entry into banking with restrictions on voting rights and control over the bank. One way of addressing this issue could be to look at diversified ownership and separation of management from ownership. This will disqualify family-run big firms but professionally managed houses with a good track record can enter the business.
Also, RBI can take a graded approach and the minimum capital requirement can depend on activities one needs to be involved in. Every new bank does not need to do everything. Four of the first set of 10 banks that opened in the early 1990s could not survive. I am sure some of the new banks that will open now also may not survive, but that should not prompt RBI to restrict the number of new players. It should be liberal in granting licences if it is serious about financial inclusion.
As we celebrate another Independence Day, it may not be a bad idea to see how much freedom India’s banks and the banking regulator enjoy.
Joining the debate on the dispute redressal ordinance in Parliament, finance minister Mukherjee said RBI has two distinct roles—one as a monetary authority and another as a regulator—and it enjoys full freedom on both counts. Its freedom as a regulator has been compromised on account of the ordinance which has now become an Act.
Its role as a monetary authority has never been taken seriously by the finance ministry.
Almost everybody in the finance ministry who has media exposure has opinions on interest rates and inflation and expresses them. No wonder then that the RBI governor needs to go to Delhi and call on the finance minister ahead of every monetary policy.
Commercial banks need freedom to pay their employees.
It’s also high time RBI freed the savings bank rate, the last bastion of mandated rates in Indian banking.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Your comments are welcome at firstname.lastname@example.org