New Bank Licenses-Reason to Ponder Upon !!
Talk about the recent feature that has been capturing the interest of the financial sector and has been a part of the economic debates spreading like wildfire and you would definitely come across the issue of new bank licenses being drawn out by the RBI. Why?? Well that is the part that has caused the hue and cry. The purpose that the RBI wishes or hopes to accomplish and the steps being taken is indeed speculative and doubts have been raised over the decision and what waits with it? It would either fulfill what it plans on doing or fail to fall back at the same stage as currently prevailing. A little look into what has been happening and we would be at a better position to understand the pros and cons of the whole scenario at hand.
The recent guidelines on New Bank Licenses by RBI have opened the doors for the entry of third set of private banks into the 73 trillion banking sector. Looking at non-financial players like Aditya Birla Nuvo Ltd, Reliance Capital Ltd, L&T Finance Holdings Ltd, and Bajaj Finserv Ltd.which having past record of sound credentials and integrity along with being financially sound with a successful track record of 10 years, one would normally hope of improved productivity of the banking sector, which has been seen stagnating over the last few years.
No doubt about the fact that if the right candidates are selected, they will be able to bring in significant amounts of capital. But everything which glitters is not gold. Just like “Every coin has a second face”, there is another face to it too which is the hype associated with the purpose that these banks licenses along with the new banks aim to accomplish.
In the first phase when bank licenses were issued the primary objective was to grant licenses to private sector banks. However, the main focus of issuing licenses this time is to foster financial inclusion. The reason being held upon by authorities is that the government will have to infuse Rs. 70,000 crore – Rs. 90,000 crore capitals in the public sector banks over the next five years to enable them to meet the capital requirements. Thus, the thought process was that by allowing new banks in the system it would help ease the burden of financial inclusion away from the public sector banks. There are high possibilities of misuse of the licenses by corporate entities and it would also be difficult to monitor the flow of credit to these groups of companies.
Looking at the modus operandi of the whole scenario, and what has been occurring-after initial shifting process in which they are checking for completion of documents, technical qualification of the applications they will then be evaluated by an external committee. This committee will finally make recommendations to the central bank. But who should be the members of this committee. Which mix of experts is going to help fulfill the right objectives is again a matter of speculation?
In our opinion, public policy experts and financial sector experts will be the perfect mix but unfortunately that is not happening. Questioning the criterion, if it is simply deep pockets, then obviously the corporate houses would be the strong contenders but if the criterion is financial inclusion, then public sector entities such as LIC and Department are preferable. The real point of concern is that both these objectives can’t be fulfilled altogether. One of them needs to be prioritized.
Now coming to their prime objective, the main question that arises is what made them feel that introduction of these banks will help in financial inclusion? RBI has also stipulated that any applicant applying for a banking license should set up at least 25% of its branches in unbanked rural centers with a population of less than 9,999. Seems to be very effective!!! But now let us see the country’s current scenario; only 35% of Indian population has formal bank accounts as compared to an average 41% in developing economies. Nearly 70% of India’s population lives in villages.
However, a vast majority of approximately 6, 50,000 villages in India do not have a single bank branch thus leaving a huge chunk of rural population in the hands of money lenders. This is the story after having 53 co-operative banks and 83 Regional Rural banks. And thus a question which genuinely arises is- Why not allow all the co-operative banks to mandatorily merge with existing banks? Well its acceptance is questionable and so would be the norms under which it has to be done. RBI doesn’t want that next time if any licenses are issued we fall into a position where nobody comes forward looking at the stringent norms. A dual approach from both the positions of the bank as well as the public needs to be considered and well taken care of by the RBI.
It really seems to be surprising. As any business evolves, we expect specialization to develop. In response to competition, firms become specialists in some things and develop a competitive edge there. Many of the specialist players in Indian finance have done so over the last few decades – they have focused on serving specific needs like loans against gold, specific customer segments like semi-urban, self-employed and specific geographies. Many of the aspirants of banking license today are very successful specialists but in one sub-component of finance. Then why is it that they want to dilute their specialization built over years of effort, and merge into this undifferentiated, monolithic group called commercial banks? More importantly, will the financial system become weaker when these specialists become generalists?
Even RBI recognizes only one type of bank. So, the moment an entity becomes a bank, it is subject to the same rules and regulations as every other bank. All large Indian banks look like each other, and they all look like mere enlarged versions of what they were 10 years ago. According to me banks must keep pace with the sophistication of the real economy, where most firms do not look much like they were 10 years ago. An important feature of a sophisticated banking system is specialization. RBI can do so by giving licenses to applicants with diverse and specialist business models that focus on specific customer segments and products .Such specialist banks will be expected to focus on their own individual niches and strengthen their capabilities. This also reflects the hype associated with the purpose of these banks serving a different purpose that what it seems the banks are looking forward to.
It seems like the RBI is aiming to achieve a different objective while these firms are straying ahead for a different reason. Also, we cannot rule out the possibility that these banks might move ahead to indulge in activities like the insurance sector did in the rural areas. They went ahead and on persuasion forces from the insurance companies hard sold their policies scaring the rural people. What followed it was a lack of follow-up as a result of which everything was lost back. The rural sector constitutes a huge chunk of our economy and if these banks play foul, people would be left untouched yet again. Now, the RBI needs to decide upon what tools and tactics would fulfill its objective and I pray that this hype associated is undone and the distant appearing dream of financial inclusion would come true.