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Differentiated Licenses

Having generated so much hype in the past several months, the RBI’s decision to grant new banking licenses to just two entities – IDFC and Bandhan – has been an anticlimax to say the least. It left 23 aspirants in the field disheartened especially when the RBI system does not offer to tell them what went wrong in their cases. However, RBI governor Raghuram Rajan offered them some solace in the form of his pitch for differentiated bank licenses and on-tap approvals and his suggestion that these aspirants can apply for such licenses. So, it is going to be a differentiated banking versus universal banking scenario that is going to be the debating point. There are lot of proponents for bringing in diversity in the banking realm who believe that by encouraging diversity banks can create effective and efficient business models focusing on specific customer requirements – like utility banks, transaction service-oriented banks, payment specialist banks, priority sector-focused banks, home loan banks and financial inclusion-focused banks. They argue that regulation is all about customer satisfaction and not just about bringing the entities in conformity with law. These specialist banks will have developed their own niche operational areas, they will never become behemoths that can be prone to economic upheavals and at the same time control risks in a more systemtic manner. RBI itself in a technical paper on differentiated bank licenses way back in 2007 felt that “some of the banks may like to follow a niche strategy rather than competing as full service all purpose banks”.

But, the onus is on RBI itself gearing to handle such banks, understanding the nuances of their business models, drafting preventive regulatory measures and ensuring protection against possible malpractices and at the same time ensuring that the basic tenets of banking regulation – capital adequacy, audits, reporting and compliance, etc – are adhered to.

In this regard, it is but apt to revisit the proposal of an Indian Finacial Code mooted by the government-appointed Financial Sector Legislative Reforms Commission, which felt that there is need for a unified financial agency in the country, which will, among other regulators, also regulate the RBI.

The idea of differentiated banking is not new. In several countries, different licenses (maybe to the same entity) are issued for different banking operations – commercial banking, savings bank, mortgage banking, investment banking, etc.The proposal having come from no less than the RBI governor, it is clear what the regulator has in mind. There could be movement towards specialized banks in the country but how the banking customer will stand to benefit is the question in point.

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