Who Needs More Banks?

Is there any rationale behind the Indian government’s insistence that more banks will lead to financial inclusion?

WrittenBy:Kartik Malla
Date:
Article image
  • Share this article on whatsapp

Every now and then we catch a story in the news on the new banking licenses to be issued by RBI in 2014. Most articles stick to reporting on the issuance timeline or the nitty-gritty of RBI’s candidate criteria. Why aren’t we asking more pertinent questions, for instance – why do we need more banks anyway?

subscription-appeal-image

Support Independent Media

The media must be free and fair, uninfluenced by corporate or state interests. That's why you, the public, need to pay to keep news free.

Contribute

The rest of the world is in a contemplative mode, consolidating, rebuilding and enacting policies to make existing banks less risky. India, mysteriously, is in expansion mode. But to what end?

The government insists that it is to promote “financial inclusion”. Aam aadmi, you see. Now, India already has 86 commercial banks. The notion that three to four new banks (as is the intention) will have any dramatic impact towards financial inclusion is naïve. Only it isn’t. Repeating the same mistakes can’t be naïveté, can it? Because the government has already been naïve before – when it gave out new licenses in 1993 the conditions stipulated that the headquarters of all new banks would need to be located outside of the (then) four metros, to achieve said “inclusion”. The new banks merrily set up hollow “registered offices” in far flung towns and carried out business from “corporate offices” in Bombay. With hindsight, what do we know? What have we learnt? Even W couldn’t bear being fooled more than once. Contrastingly, in its own financial inclusion efforts, the RBI is actively pursuing a policy of “less is more” – it has recently reduced (by way of consolidation and mergers) the number of Regional Rural Banks (RRBs) from 196 to 62 to improve (surprise surprise) the financial health of the RRB system. No seriously, what have we learnt? If the government really cares about increasing financial inclusion why is it so hesitant to allow India Post to run a bank? Surely the network and reach of the postal department in rural areas is unmatched. Globally, it is not uncommon for the national postal carrier to offer banking services. It is felt however, that this would be “illogical” as India Post does not have the “ability to manage a bank” and should concentrate on its “core activity”. In an increasingly connected world, where emails and tweets rule the roost, someone at India Post saw an opportunity to keep their infrastructure relevant – only for common sense to meet its fated end at the altar of dull intellect.

Another promising alternative to improve financial inclusion is to make use of existing telecom technologies to enable banking in underserved, rural areas while remaining within the present structural setup – a branchless, correspondent relationship. It is a fact that 40% of the Indian population is not touched by professional banking. Simply throwing more banks in the mix will not solve the problem. The need is to create enablers and platforms for the underserved to access existing services. Instead of pushing its weight behind low-cost, innovative solutions to get the job done, the government is chasing big banner “milestone” events – ostensibly, to pat its own back in the run-up to the elections.

The RBI is seemingly not as enthusiastic as the government and has been slow to implement the policy since when it was first announced by Mr Pranab Mukherjee back in 2010. Maybe because it wants to be sensible. But with greater emphasis from the government as the 2014 polls approach, it has had to get cracking. Besides “financial inclusion”, another plank with which the government is beating RBI into submission is the magical “increased competition” panacea which will improve customer service and more importantly, bring down interest rates on consumer loans. There are however, other elements to private competition, of which the government is seemingly unconcerned. While there are already misgivings over allowing conglomerates to own banking licenses due to a potential conflict of interest (you and I deposit our savings with XYZ Bank, only for it to give it out as an ultra-risky loan to its sister XYZ Corp, when no other bank would. Bye bye savings.), the point that is being ignored is that private banks (as any private entity) work on the principal of profit maximisation. When rural banking is forcibly mandated by the license (25% of branches in rural areas as per by the RBI guidelines), it is a loss leading activity (the problems of going rural), which must be counterbalanced by profits from elsewhere. As a new entrant in a crowded industry, how would you go about gaining new customers? When you can’t (or don’t want to) decrease your lending rate anymore, how would you break customers away from established banks? You could give up and shut your shop, or you could do what they did in the US a few years ago – start giving out loans/overdrafts/credit to people who (based on their credit history) shouldn’t be getting any in the first place. Creating a new customer base, increasing the size of the pie, or as it’s more famously known as – sub-prime lending. How soon before we start getting the Indian version of the famous NINJA loans as a sweetener for opening a new account? Or how soon would the mad scramble to hit branch targets result in new instances of domestic money laundering by eager managers, stashing away the great Indian black money cache into a myriad of insurance schemes and mutual funds? Is the RBI/government currently working on structural measures to safeguard consumer lending and prevent money laundering? Presumably (or rather, hopefully).

In 1993, the last time new licenses were issued, we started with 9 new banks. One of them was the Global Trust Bank (GTB). Soon it emerged that GTB was indulging in reckless, high risk lending and criminally colluding with unethical traders like Ketan Parekh to not only make profits illegally, but also to put at risk the credibility of the Indian stock markets and the entire banking sector. What is worrying is that the RBI had plenty of evidence against GTB for the longest time, but had to wait for a new regime at the Central government before it could take any action – which it finally did in 2001.

While India may have escaped the 2008 financial crisis relatively unscathed (and should count its blessings), the need of the hour is to strengthen the banking system so that we never face such a situation in the future. As recommended by IMF, we must look to give the RBI more power and oversight, which would enable it to deal with systemic risks and structural integrity in a more deliberate manner. The RBI decision-making needs to be independent of its political masters and it needs to institute a dedicated banking regulator, separate from the RBI (which is essentially a central bank), to ensure that the issues and concerns of the consumers are paramount. What we don’t need are shortsighted political maneuvers, aimed to win brownie points with the electorate.

imageby :
subscription-appeal-image

Power NL-TNM Election Fund

General elections are around the corner, and Newslaundry and The News Minute have ambitious plans together to focus on the issues that really matter to the voter. From political funding to battleground states, media coverage to 10 years of Modi, choose a project you would like to support and power our journalism.

Ground reportage is central to public interest journalism. Only readers like you can make it possible. Will you?

Support now

You may also like