The suspense over new banking licences will soon be over. With finance minister Pranab Mukherjee announcing that the RBI is planning to issue the guidelines for new banking licences before the close of this financial year, presumably, it is only a matter of days before the RBI comes out with its final guidelines. It has already issued two draft papers inviting comments; so, the motions have been gone through and according to news reports, the final version has gone to the finance ministry for vetting. Ostensibly, new bank licences are needed to ensure competition and promote financial inclusion. The FM, in his Budget speech last year, was emphatic on that score.
"We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services." RBI's discussion paper on entry of new banks echoes this view. "It is generally accepted that greater financial system depth, stability and soundness contribute to economic growth. But beyond that, for growth to be inclusive requires broadening and deepening the reach of banking. A wider distribution and access of financial services helps consumers and producers raise their welfare and productivity."
The only difference between the FM and the RBI's position seems to be one of emphasis. While the FM seems to regard the need for new bank licences as driven equally by the need for more sophisticated (?) banking services and financial inclusion, the RBI seems inclined to view it more as a means of ensuring greater financial inclusion. RBI governor D Subbarao is on record that financial inclusion will be one of the main criteria on which licences will be given.
Either way, access to sophisticated banking and financial inclusion are the main drivers for issue of new bank licences. Take them one by one. First, the FM's concern that we need to have banking services that 'meet the needs of a modern economy'. As on March 31, 2009, we had 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks (RRBs), four local area banks (LABs), 1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks.
So, we certainly don't lack numbers! And nor, it would seem, do we lack modern banking services, given that virtually every major foreign bank in the world has a presence in India. Hence, access to sophisticated banking products is not for want of sophisticated players. They are already here. What about financial inclusion? Here the position is less encouraging.
Less than 50% of Indians have access to formal banking. Today more Indians have a mobile telephone than a bank account! If you allow for the fact that many Indians in metropolitan and urban areas have more than one bank account, the picture becomes even more disturbing with rural and semi-urban areas vastly under-banked. The far more pressing case for issuing more bank licences, therefore, is to remedy this imbalance and promote financial inclusion. Will new banks do that? If yes, the case rests and there is nothing more to be said. We must licence more banks. If not, there is no case for new bank licences; at least, not on the grounds of financial inclusion.
So, let's go back to the mid-1990 s when 10 new banks were set up in the private sector (two more came up after the revised guidelines of 2001), ostensibly for the same reasons bandied about today - to promote competition and increase coverage. However, not all survived, leaving a total of seven new private sector banks on date. Seven out of 12 is not bad but it is not a score card that bolsters the case for new bank licences, especially in the light of what the 2008 crisis has taught us of the serious systemic consequences of bank failure. But we could still overlook that if the larger cause of greater coverage were served. Has it?
No. Data shows new private sector banks had only 6.5% of their branches in rural areas as on March 2010. In contrast, nationalised banks had 31.6% of their branches in rural areas while State Bank of India had 32.7%. Meanwhile, the share of rural deposits and advances has come down from 10.8% in March 2006 to 9.2% in March 2010 and 8.4% to 7.5% over the same period. Therefore, whatever else the reason for issuing new bank licences, financial inclusion cannot be one. Neither can access to state-of-art banking products. So, what can? Corporate lobbying? Perhaps! But that does not mean the sector should be closed to entry. Rather that the fit-andproper test must remain the only yardstick and the RBI the only arbiter of that.
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