Govt. should give Financial Inclusion some more shape
National Leader, Global Financial Services
The discussion on the new bank, licences began with the Finance Minister’s budget speech, one and a half years ago. The key needs that were identified were making the Indian Banking more sophisticated and efficient and more significantly providing an access of banking and financial services to the financial outsiders. The announcement envisaged the non-banking financial companies and other new companies to be offered the opportunity to participate in the sector.
Later, the regulator came out with a detailed discussion paper and made the discussion even more involved and interesting. Several issues were covered in the paper and views and comments were invited. These were summarized and published subsequently. The views were very sharply divided on all the major questions which were raised. There was an impression that was perhaps gaining some shape.
Somehow, the crying need for financial inclusion and a need to introduce a sizable capital into the banking system to support credit expansion for projected economic growth may not be met with by offering more banking licences. Perhaps the sector would face larger systemic risks that the regulator and eventually the sovereign may be required to face.
The newly announced draft guidelines manifest more detail in that impression. To begin with the regulator does not see participation of foreign investors to bring in larger capital and perhaps suspects that the promoters of the new banking companies may not reduce their hold and equity once they get their licences. There is adequate evidence from the previous licencing experience to support that impression.
Also, the aspects of the governance of a certain order that is essential from the banking sector is at the core of the debate. The extent to which the liability is leveraged, in the common equity to deposits ratio does call for a much larger control required.
The draft guidelines seem to demand larger empowerment for the regulator to exercise that order of control. Several policy matters will have to be addressed by the government and the regulator in order to move forward. Does this mean a long haul to introduction of new policy to the banking licencing? Not necessarily, if the needs for the new regime are well understood and steps taken to do so is well articulated.
Then there are a few softer issues to be addressed to introduce the reform.
There has to be a more detailed understanding on these areas. The government and the regulator should perhaps give financial inclusion some more shape and articulation. Making the banking services available to the financial outsiders is not an established and viable business proposition.
If it was an adequately profitable or viable business, we would have seen the existing players making deeper forays into it already. The products and delivery models are evolving and yet there is no evidence of established levels of cost, pricing and profitability in the business. As a line of business, it will have to be subsidized and supported till it becomes independently viable. This may take some time. There has to be clarity beyond merely the tier 3 to 6 geography presence, with 25% presence in rural areas.
The size of this business to the overall deposits and loan banks in a phased manner or over a certain period of time should be discussed. Likewise, the other issues which will render the promoters as fit and proper or otherwise should be articulated. There are several characteristics including the diversified shareholding and presence in real estate or broking business which are mentioned in the draft guidelines recently announced. These need more articulation.
It may be concluded that the regulator and the government may take one of the two approaches to this reform.
They may address and articulate these aspects in the form of measurable parameters to the extent possible and required and then evaluate the promoters’ bids or application in that framework or do it on a case to case basis. Both approaches have their merits and limitations. It should be interesting to see the approach it chooses to adopt.