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New Breed of Banks Coming

The Reserve Bank of India is all set to issue new banking licenses.

What could be the impact on the sector? Four senior banking experts offer their views:

In the light of the Reserve Bank of India’s decision to grant new licenses to banks, a common question that comes up frequently is whether the country needs more banks and if yes, what could be the differentiating factor. More numbers is justified because there is a vast population that remains unbanked or underbanked and the existing banking enterprises have not been able to service this need.

Without any argument, India’s economic model is very much dependent on banks and banking-related institutions. And the banking system performed commendably in the face of the global crisis though not a single Indian bank is in the list of top 50 global banks. Bankers point out that this is largely on account of lack of capital. May be this purpose would be served to a large extent when the RBI licenses new banks in the next couple of months.

Broadly, RBI has three clear objectives in its decision on new licenses – financial inclusion, a better and more efficient reach of financial services and reaching out to the rural population.

Atul Atul Joshi feels Indian banks shoud aspire to become among the most efficient banks in the world than targeting to be among the top 50?

Atul Joshi, managing director and CEO, India Ratings & Research, who is an avid follower of the Indian banking system, feels that there are three key aspects banks would focus on while offering banking services in rural areas – deposit/credit opportunities, investment opportunities and insurance coverage. RBI wants the new banks to have a wider focus on rural areas in terms of financial inclusion and priority sector blending to meet these objectives.



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Says he: “Today, we have a significant banking presence in rural areas through public sector banks as well as other banking institutions. There are now 80 plus RRBs in the country, more than 90,000 PACS and 1600 cooperative banks along with their branch network apart from DCCBs and state apex cooperative banks. There are nearly 200,000 branches in aggregate of the banking system, excluding the NBFCs and MFIs. As an aggregate delivery mechanism for financial products, there probably is sufficient coverage. Hence, the mere addition to this number coming from say 20 odd new entities may not meet the objective of financial inclusion. Secondly, the implication of creation of new banks means that the existing infrastructure, in terms of physical branch network, trained manpower, systems and processes in practice etc from cooperative banking system will remain unutilized. We will simply add another layer of new entities instead of clearing inefficiencies within the existing system. Thirdly, rural banking per se has not been a profit making proposition for most in the banking system. Today, rural banking is more about deposit collection.Rural banking to become a standalone profit center has to move into the second and third phase as well which is credit, investment and insurance.”

An appropriate restructuring of the existing banking system in the country will be of systematic advantage, says he. “So, if we can really make use of the RRBs, cooperative banks and the PACs, the envisaged goals in terms of financial inclusion can be met with probably lesser effort and certainly in a shorter time frame. Some solution thinking is required here such as how cooperative banks can be merged with private/public sector banks and how we can make the boards of cooperative banks more independent from external influence etc.”

Growth Prospects

Notwithstanding the immediate and short term concerns over growth, profitability and capitalization, Indian banking industry is poised towards strong, secular, long term growth trajectory, affirms Monish Shah, senior director at consultancy firm Deloitte Touche Tohmatsu India. He says strong underlying demand side factors including a large unbanked and underbanked population, favourable demographic dividend, increasing global business, infrastructure financing needs, etc indicate strong potential for banking services in the country. “There is a need for increased penetration of banking services. In addition to the unbanked and under-banked households of 40%, over the next decade, India is likely to add nearly 200 million to its workforce and create a new customer pool between 18 and 25 years of age which will be mainstream banked for the first time. At a broader level, Indian banking sector needs more capital to fund the economic growth,” says he.

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