Viewpoint: Smaller Banks Better Suited for India’s Financial Inclusion Drive; Modi Should Have Waited

Thursday, February 12, 2015

There are too many takers for licences for small-sized banks.

A total of 113 companies knocked the doors of Reserve Bank of India (RBI) with applications when the deadline expired at the close of business hours on 3 February. The list (see here) includes both the biggies and tiny names.

Of the total, 72 applied small finance banks, which will carry out all banking activities of a normal bank albeit on a small scale, and the remaining for payments banks, which will offer deposit products and offer transactional services, except credit.

The two external advisory committees — appointed to scrutinise the applicants — are likely to come with their recommendations in the next few months, following which the new set of banks can be a game changer in the way banking is conducted in India.

These entities, by definition of their mandate, will cater only to the small borrower segment. The RBI has ensured this by restricting their business model to focus on the sole objective of inclusion of the unbanked and financially illiterate.

At least 75 percent of the total credit of small finance banks must be lend to borrowers who qualify under the so-called priority sector category (agriculture, exports, small housing and other economically weaker sections). Even for payments banks, the mandate is the same since the RBI has said these banks cannot hold more than Rs 1 lakh daily balance per customer.

These restrictions would logically force these two categories of banks to tap the lower end of the customers and create viable, tailor made business models in the targeted customer segment, unlike the existing commercial banks, where financial inclusion is a charity forced by regulation.

Source: Firstpost (link opens in a new window)

financial inclusion