RBI's Move Timely and Significant

Published: 09th May 2016 04:00 AM  |   Last Updated: 08th May 2016 11:16 PM   |  A+A-

The Reserve Bank of India’s (RBI) intent to issue universal bank licences through the year, is a significant and timely departure from its ‘stop and go’ licensing policy. Currently, a few state-run banks control nearly 70 per cent of India’s banking assets, a trend last seen in the post-independence era, where banking resources were concentrated in the hands of a few private business families. With nationalisation of banks in 1969 and 1980, the ownership pattern reversed, but issue remained.

Banking access is inadequate despite the presence of over 26 state-run banks, 20 private banks, 43 foreign banks, four  local area banks and 64 regional rural banks that collectively cater to just about 40 per cent Indians. Since 1991, household financial savings grew 16 times and gross domestic savings nearly 17 times, showing that, aided by growth, improved banking access can accelerate savings. But penetration is limited despite mandatory 25 per cent branch network presence and priority sector lending in rural areas. This is what RBI and the government aim at addressing with private participation.

It’s a widely-held view that private banks are more profitable and efficient than PSBs. Their return on assets and equity is higher than in state-run lenders, crumbling under the weight of toxic loans. RBI believes that by encouraging more private players, competition will stiffen, paving the way for innovative ideas that aid financial inclusion. At the same time, the RBI acknowledges that public-ownership has positive implications as demonstrated during the 2008 financial crisis. While reorientation of the existing banking structure is laudable, the regulator and government may want to simultaneously strengthen state-run banks either by infusing capital or merging small players or both to counter competition. Strengthening deposit insurance and resolution mechanism will also boost confidence among consumers to trust private players with their deposits.


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