New Banks

If the new banks too start functioning in urban areas, it would be just tokenism towards financial inclusiveness.

The RBI's announcement that it will allow four new banks to be opened has sparked much interest as it had been under intense pressure from both large corporate groups and a section of the government. Recent reports indicate the RBI, which has been deferring this decision for two years, might announce guidelines for new banks before October 30, when it announces its monetary policy review.
It is believed, though, that actual licences will be given only after the Banking Laws Amendment Bill is passed. The ostensible reasons to issue licences for new banks are to increase competition and promote financial inclusiveness. The government is also keen to push it as part of a recent slew of reforms to combat the image of “policy paralysis“ it had been accused of from all sides, within and out side the country.

At first sight, the reasons do not sound very convincing unless the RBI makes it mandatory for these new banks to open pri marily in the country's unbanked regions.

If the new banks too start functioning in urban areas, it would be only tokenism known towards financial inclusion. It is well that brick-and-mortar banks can be very expensive to manage in unbanked areas. That is why in recent years various areas. That is why in recent years various other avenues like mobile banking, business correspondents, microfinancing and other such channels have been explored to provide credit to weaker sections and particularly in unbanked areas.

The more likely answer would be “local area banks“ (LABs), which by definition are limited to specified geographical areas, and can therefore give more intensive and concentrated help to weaker sections in those areas. So if four new banks are to be given licences, at least two of them should be for LABs. The Raghuram Rajan Committee's suggestion that preference be given to small and medium-sized entities might be a good idea, though the RBI has kept this in abeyance as some of them may not be able to meet the capital requirements specified by the RBI. However, banks envisaged to further financial inclusiveness may not need a large quantum of funds.

The RBI has over the years moved very cautiously on this issue: this is evident from the fact that only 12 banks have been given licences since economic liberalisation began in 1991. It is quite correctly wary of the role of big corporate groups -there would evidently be a conflict of interest there. So unless the regulator, the RBI, is given enhanced powers -such as being allowed to vet the account books of corporates and given authority to supersede their boards if need be -giving licences to corporate groups, whether big or small, might imperil our financial stability.