This newspaper has for long argued that India needs more banks rather than less—and we have thus been keener about financial inclusion than bank consolidation.
Illustration: Jayachandran / Mint
That is why the announcement in the Union Budget that the Reserve Bank of India is considering giving out new bank licences to the private sector is welcome. It is especially good to see that private companies are being invited into the game. This is in sharp contrast to the clear defence of bank nationalization by Pranab Mukherjee in the July 2009 budget speech: “Never before has Indira Gandhi’s bold decision to nationalize our banking system exactly 40 years ago…appeared as wise and visionary as it has over the past few months. Her approach continues to be our inspiration even as we introduce competition and new technology in this sector.” Much water seems to have flowed under Howrah Bridge since then.
A lot of thought is needed before the authorities decide which private companies get bank licences. The new private sector banks that have done best since they were given licences in 1994 are the ones promoted by large financial institutions such as ICICI and HDFC. The others have struggled, been sold or collapsed. There are not too many financial institutions that will be in the queue to start banks this time around. So the licences will have to be given to either private finance companies or to private business houses. It is good to remember here that it was the tendency of large business houses to use their banks as private finance arms that led to the calls for social control, and then bank nationalization in the 1960s.
The one big achievement of bank nationalization is that it gave millions of poor people and small enterprises access to modern finance. Yet, one in every two adult Indians still does not have a bank account. Initiatives such as building the so-called bank-self-help group (bank-SHG) linkages and routing welfare payments through banks are important steps. But what India needs in the long run is more competition in the banking sector, a larger branch network and intensive use of technology to drive down the costs of servicing low-income depositors.
It is in this context that we have been arguing for more policy focus on financial inclusion and less on bank consolidation. The finance minister told The Hindu Business Line newspaper a day after the Budget, “Right now I am not thinking of (bank) consolidation.”
We think it is the right call.
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