The final guidelines laid down by the Reserve Bank of India on the contentious issue of issuing licences to private sector companies to set up new banks seem all-pervasive and strict in ring-fencing the new banks from being misused by promoters to finance their own enterprises. But if the objective of giving licences to new private sector banks is to promote financial inclusion and bring the excluded into the economic mainstream, then the guidelines fall short.
The guidelines stipulate that 25 per cent of the total branches must be in rural and unbanked areas with populations of less than 9,999 as per the latest census. There are today 138 districts that are distressingly unbanked and, according to the RBI’s own study, 41 per cent of the population is unbanked, which means around 410 million people, bigger than the population of several countries. Most of these are in the really poor areas, particularly in the Northeast. According to one report, it is estimated that 51 per cent of farm households have no access to formal or informal sources of credit and 73 per cent have no access to any formal source of credit. In this scenario, would 25 per cent meet these requirements? Are new private sector banks the answer to the financial inclusion objective? In what time frame would these branches in unbanked areas be set up once the licence is issued? Or will the promoters do it only after they finish with the creamy areas? And will the RBI be under political pressure to let off those who don’t fulfil the targets with a fine after some years? It is well known that the system can be manipulated.
The RBI had obviously been under pressure to permit real estate and brokerage houses to apply for new bank licences. So the tweaked guidelines use the phrase “in principle” restriction on these sectors whose activities are speculative in nature or subject to high asset price volatility.
The same strict guidelines will apply in the case of the public sector being permitted to set up new banks. While the public sector is indeed more serious about its social responsibilities, there is a need for safeguards against political interference.
The major concern is that the money should not go to the wrong people but to those who desperately need it. That is why it is felt that new private sector banks may not be the answer to the financial inclusion objective. Those who want to game the system have ways of doing it and are always one step ahead of the regulators. No amount of ring-fencing works.