Challenge of banking inclusion

Challenge of banking inclusion

Finance minister Pranab Mukherjee made clear in his February Budget that “financial inclusion" demands more private banks. On cue, the Reserve Bank of India (RBI) last week released a discussion paper to mull over this issue.

More private banks can surely boost India’s economy through greater competition. But, since the government is selling this idea along “inclusion" lines, the one question RBI has to ask when formulating its final guidelines is: How will more private banks help inclusion?

Over the longer term, we would think these new banks have every incentive to move ruralward to tap an unbanked market. But this certainly needn’t be the case over the short term: The boom years last decade, for instance, saw a number of banks going after the same urban segment.

And if a new bank wants to establish itself, chances are it won’t have “inclusion" on its mind; it will start by targeting an urban or corporate market. Perhaps that will persuade existing urban players to start expanding rurally. Perhaps not: The incumbents could well decide to stay on in urban India to consolidate their position.

Hopefully, RBI has some idea of the market dynamics here. Either it should be willing to wait for market forces or it should start mandating inclusion more forcefully.

RBI is clearly considering the latter. It notes, for instance, that it could only allow those new banks whose business models stress inclusion. But this strategy has a big drawback: Entrants then can’t easily compete with incumbents. Does the answer lie, then, in stricter inclusion mandates across the board?

It is still unclear how any of this will pan out. But it is worth pointing out that India’s last decade of banking experience doesn’t prove that more private banks automatically equals inclusion. There aren’t enough private sector bank branches in rural India. But there can be, if accompanied by the right regulations.

In fact, for all the controversy over awarding banking licences to industrial houses, RBI could ensure these houses directly aid inclusion another way. As the Boston Consulting Group’s Saurabh Tripathi suggested in these pages in April, RBI could give, say, Tata a licence to be a banking correspondent—not to be the agent which usually acts ATMs for the unbanked, but to employ its balance sheet to revolutionize this last-mile segment through new conceptual thinking.

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