India Should Go With More Banks

The government and the RBI are completely off the track, if they indeed plan, as reported, to restrict new banking licensees to rural areas and no-frills accounts for the first couple of years. This is no way to go about achieving financial inclusion. Making new banks waste capital doing things that established banks have not found it worth their while to do, is not the way to make banking inclusive.

Rather, the way ahead is to make extensive use of technology and innovative process. The New Pension System and the depository system for dematerialised shares offer the lesson that a common infrastructure provider can create and maintain all the millions of accounts that banks need to service their customers . Depending on the mutual agreement of a bank and a customer, a particular account of his can be assigned to a particular bank.

With crores of accounts on a common platform, the overhead costs would be spread thin over individual accounts, bringing charges sharply down. Then there is the actual process of banking via small transactions. The people who have excelled in the art of making big money from millions of small transactions are the mobile telecom players, whose technology and business model can easily be modified to serve additionally as a banking platform as well, at least for a rudimentary set of transactions.

The government and the RBI need to show some courage and allow innovative forms of banking. With total bank lending less than half the size of the GDP,

Indian banking is stunted and a boon to money lenders, who straddle the space vacated by the banks. We need more banks and innovative banking. More banks in towns will mean competition driving players, whether old or new, out to rural areas as well.

The regulator’s real problem seems to be in deciding whom to keep out while granting new licences. The way out is to lay down objective corporate governance norms for the applicant promoter group of companies. Those who fail the test should politely but firmly be told to cool their heels, while those who qualify should be given regular banking licences on par with the existing ones. There is no case for waffling on the subject.

Source:Economic Times.

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