BackNew era in banking
Institutional innovation is welcome but it has to be supported by effective regulation
PremiumThe building blocks of a new banking structure are being put in place. The Reserve Bank of India has given licences to 11 payments banks and 10 small banks. This is welcome. A complex country such as India needs a variety of institutions to meet its financial needs. Universal banks cannot do the job alone.
In a way, the clock is being turned back. India had set up innovative financial agencies to meet its development needs. The lack of a private market for long-term finance led to the creation of industrial development banks such as the erstwhile ICICI. The unique problems of agricultural lending led to the creation of the regional rural banks.
The ongoing institutional innovation is different. It is riding on new technology. But the eventual failure of previous niche financial institutions should serve as a warning: such institutional innovation is welcome but it has to be supported by effective regulation. The job of the central bank is not done once licences are dished out.
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