SMALL BANKS, Big Expectations: The Global ANALYST
The Global ANALYST, November 2015
SMALL
BANKS
Big Expectations
M G
Warrier
“In order to
get sustained growth we need more competition, especially from new entrants who
are in a better position to reach hitherto excluded parts of our economy.”
Dr Raghuram
Rajan, Governor, RBI
The proposal to licence small finance banks can be seen
as a continuation of making certain provisions of Banking Regulation Act, 1949
applicable to cooperative societies through enactment of Banking Regulation
Act(As Applicable to Cooperative Societies) during 1960’s.
The existing banking structure in India, comprising
public sector banks including State bank of India and its Associate Banks, old
and new private sector banks including the new entrant from the MFI family,
namely Bandhan Bank, Regional Rural banks, Local Area Banks, primary(urban)
cooperative banks, state and central cooperative banks dispensing credit
through thousands of primary cooperative credit societies, evolved over several
decades, is elaborate and has been serving the credit and banking services
needs of the economy. This structure has multiple layers to cater to the
specific and varied requirements of different customers and borrowers. The
banking structure has been instrumental in the mobilisation of savings and
promoting economic development in India. In the post financial sector reforms
(1991) phase, the performance and strength of the banking structure has improved perceptibly.
Financial soundness of the Indian commercial banking
system compares favourably with its counterparts in the advanced and emerging
countries. The credit for this goes entirely to the post-independence political
leadership of the country which allowed functional autonomy (RBI Governor Dr
Raghuram Rajan recently referred to this as ‘De facto autonomy’) to judiciary and the central bank all through,
including during the stressed period of emergency, when democracy was in
captivity. Reserve Bank of India on its part never assumed a confrontational
position against GOI on any issue at any point of time.
Instead, where felt necessary, RBI delayed
implementation of its own decisions, which its professional wisdom approved as
right, till it could take GOI into confidence. Such delays, at times have
resulted in avoidable losses to the country and brought down the reputation of
RBI by a shade. RBI top management has all along been taking the position of a
caring teacher, when occasionally, some individuals in government assumed
recalcitrant positions on crucial issues. The approach helped the central bank
to play its regulatory and supervisory role with confidence.
This explains the philosophy behind RBI’s moves in changes
in regulatory norms and institution building in the financial sector. There is
a general perception among analysts and economists who comment in the media
about the recent moves by GOI and RBI to increase the banking network by
introducing new players as something new. Let the records be put straight by
mentioning that the process of reforms in the banking institutional structure
is an ongoing one in India and within RBI, studies for making the performance
of banks better are taken up from time to time.
The discussion paper “Banking Structure in India- The
Way Forward” released by RBI during August 2013(accessible from RBI’s website
rbi.org.in) was the result of one such effort. The paper claimed that the primary
motivation for the exercise of reviewing the Indian banking structure was to
cater to the needs of a growing and globalizing economy as well as deepening
financial inclusion, recognizing the importance of incorporating lessons from
the global crisis, even when the Indian banking system had remained largely
unaffected by the global crisis. The document gives the progress so far and
RBI’s thinking about the future of the country’s banking structure.
Concept of
small finance banks
The proposal to licence small finance
banks can be seen as a continuation of making certain provisions of Banking
Regulation Act 1949 to cooperative societies through enactment of Banking
Regulation Act(As Applicable to Cooperative Societies) during 1960’s. Cooperative
societies engaged in the business of banking and satisfying certain criteria
were compulsorily brought under the purview of Banking Regulation Act and those
which wanted to remain outside RBI regulation were given option to do so
subject to certain conditions like ‘not accepting deposits withdrawable by
cheque’. After cooperative banks, Regional Rural banks (RRBs) and Local Area
banks were set up in the small banks’ category with specific mandates to cater
to the savings and credit needs of certain
categories of clientele which did not get adequate attention from bigger banks.
The new category of small finance banks
now being licenced belong to a different category and there seems to be a new approach on the part of RBI in selecting the
eligible applicants for issue of licence to this type of banks. The cautious
stance while selecting new promoters for licensing big private sector banks and
the effort to bring many players who are already doing banking-like business
into mainstream banking seen in the selection of candidates for payment banks
and small finance banks reveals a broad pattern in RBI’s thinking.
As the existing private sector banks
(old and new generation) have not made much progress in increasing their share
in banking business which remains at around 25 per cent, the balance being
still with public sector banks, bringing more players may not help much in
increasing outreach or promoting financial inclusion. Bringing existing players
from the microfinance institutions(MFIs) and supporting organisations like
India Post to instil professionalism in mobilisation of savings and providing
credit to small borrowers make more sense.
Small finance banks and financial inclusion
More than three years back, I had
concluded my first article in this magazine, which was on financial inclusion,
with the following observation:
“The speed with which changes are
brought about in the approach to governance and financial sector reforms will
define the timeframe within which India will be able to come out of the present
impasse. Coming out, India will. Present eruptive symptoms show that ‘we, the
people’ will not show the patience with which they waited for generations to
gain independence, for realizing basic human rights. Financial inclusion will
expedite empowerment towards achieving this goal. The segment of the generation
which benefited maximum from LPG(Liberalisation-Privatisation-Globalisation)
policies, those who were in the age group of 15-35, circa 1991 should take the
responsibility to take India out of the mess in which the lazy generation to
which I belong has landed the country. It will be in their self-interest.”
I am looking back with satisfaction the
developments on the economic front in recent times in our country.
Writing about this year’s economics
Nobel winner Angus Deaton, Justin Wolfers, professor at the University of
Michigen makes the following observation about data:
“…For too long, econometric analysis
had proceeded as if data were simply handed down from a statistician-loving
higher power. The reality is far uglier: Data are imperfect, surveys can be
unrepresentative, people misreport, and attempts to recontact survey
participants often fail. Deaton confronts these issues head-on, and he has
taught economists how to extract meaning
from imperfect data.”
The quote is relevant not only in the
context of the dilemma faced by planners, social scientists and regulators
equally in understanding poverty and financial inclusion. Even the feedback
given to Prime Minister Modi about the progress made in implementation of
Pradhan Mantri Jan Dhan Yojana need to be viewed again, after going through
this observation by Justin Wolfers. Prime Minister was informed that additional
deposits of Rs 32,000 crore had accrued into newly opened accounts under the
scheme. PM said, “Hum abhee tak ameeron
ke gareebee dekhe hei…Ab hum gareebon ke ameeree dekha…”(So far we have
seen the poverty of the rich…Now we saw the wealth with the poor…)Without
contesting facts, let us also remember that banks with lakhs of crores of
deposit base, in any case will be opening new accounts and accepting fresh
deposits. This is not to belittle the achievement under the scheme with
provision for zero balance accounts for ensuring financial inclusion, but to view
data with an open mind.
The way forward
The RBI Discussion Paper of August 2013 is based on
in-depth in-house studies and the present RBI position on future banking
structure takes into account the findings of those studies. This enhances one’s
confidence in the central bank’s professional competence in addressing various
issues such as enhancing competition, financing higher growth, providing
specialized services and furthering financial inclusion. It is in this context
one has to view the present transition of the Indian banking system back to a
new variety of multi-agency approach which
has been covered in some detail, last month in this magazine.
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(The writer is a former General
Manager, Reserve Bank of India and author of the 2014 book “Banking, Reforms
& Corruption: Development Issues in 21st Century India")
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