Increasing banking penetration in India

The RBI recently brought out a discussion paper on giving out new banking licences to business houses and non-banking financial companies (NBFCs) to increase competition in the sector, and also expand the reach of banking services across the country. The estimated banking penetration in India is about 45% among middle and high income groups and less than 5% among low income segment. Expanding the reach of banking services is crucial to tap the country’s savings and investments. Microfinance institutions have been partly effective in tapping rural savings, 41% of which are held as cash according to NCAER estimates. The RBI therefore has a clear mandate in awarding new banking licences, however, more deliberation is required on a few issues before the RBI actually implements it. The issues that are being debated widely in this context are - minimum capital requirement, shareholding of promoters and foreigners, permitting industrial and business houses, and NBFCs to start banking arms. RBI’s stance on disfavoring groups with real estate interests was a bold assertion. It highlighted the view that linkages with the real-estate sector, given its sensitivity and any subversion of the Chinese walls between the bank and real-estate business would have implications for the financial stability of the bank. On minimum capital requirements, we hold the view that the RBI should set it in the range of 300 to 700 crores and gradually increase it to 1000 to 1500 crores over a period of five years, in order to encourage only serious players to apply for licences. We recount here that the RBI, in 2001, had set a minimum capital requirement for banks at Rs 200 crore, which was to be increased to Rs 300 crore in 2004. We also expect the minimum capital requirement for other banks to go up once the announcement for the new banks is made. In addition to technical details, we hope that the debate also includes innovation in banking models and leveraging technology for better penetration of banking services, especially transaction banking at a time when mobile phones have seen high penetration in rural areas. If the business is able to generate wider employment opportunities and is also able to gain access to a wider customer base, then it’s a win-win situation for both the business and the people.