When erstwhile finance minister Pranab Mukherjee brought in the idea of issuing new banking licenses in his budget speech for the financial year 2010- 11, the basic idea behind the same was higher financial inclusion. Interestingly, it was the same ‘greater cause’ that drove RBI to issue licenses to 10 new private banks in 1993 and 2 more in 2001 with revised guidelines. But did we get any benefit out of it?
As we had analyzed in one of the cover stories a few months ago, this strategy never worked. Even after a decade and half, and a plethora of tall claims on rural strategies, only 6.5% of these banks’ (new private banks) branches are present in rural areas, (whereas the same stands at 32.7% for State Bank of India and the average for nationalized banks is at 31.7%). The viability of the strategy to achieve the desired goal is certainly a big question mark. In fact, it is further dented by the fact that as the new private banks are growing older, their focus is increasingly shifting away from rural India to higher profit bearing non-traditional banking services in the urban area. As a result, the share of rural deposits and advances in their books has already come down from 10.8% and 8.4% in March 2006 to 9.2% and 7.5% in March 2010 respectively. So what kind of financial inclusion are we looking at now by issuing new banking licenses?
On the other hand, this move will end up crowding the Indian banking arena with a number of small banks. And considering the small capital base of these new banks, their focus will remain mostly on more profit making through retail lending. If that is the target, then we already have a large pool of NBFCs for that purpose. What India needs at present is a strong banking industry with large banks that can play an active role in project financing and provide the much desired boost to industries. But as it can be seen, it’s the PSU banks alone who are active in this arena taking the long-term risk, while the private banks, especially the smaller ones, are more concerned about retail lending and selling non-banking products like mutual funds and insurance. Funding of telecom companies for 2G licenses was an example in this direction. PSU banks’ total exposure here was over Rs.140 billion, while the same for private banks were a lot lesser.
Keeping these things in mind, it’s time to understand that issuing new licenses are not going to help the country by any means. But if it has to be done, then the RBI must include a few compulsory clauses in its guidelines to force the new banks to have sufficient presence in rural India to ensure a material impact on financial inclusion. At the same time these banks must also be forced to divert a particular portion of their lending towards project financing. Without these, creating new banks will be just like changing the NBFC tag of a few entities without any substantial impact on the existing situation.