Sunday, October 16, 2011

New Banking Licences – Specialized Banks may serve the cause!

New Banking Licences – Specialized Banks may serve the cause!
The Draft Guidelines for Licensing of New Banks in Private Sector has elicited positive reaction from corporate houses and NBFCs, many of whom are keen to enter the banking sector, because of its strong growth rates and healthy profitability. However, India already has more than 160 commercial banks with over 90,000 branches and a deposit base of Rs. 50 trillion; addition of few more generic commercial banks may not be very helpful, unless the new licences are designed to create specialized banks that will cater to a specific policy objective.
India definitely needs more banks as the last new licence issued was almost a decade old and the financial sector has witnessed unprecedented change during this period, in terms of use of technology in banking, customer service, products offered, etc.  But there is broad consensus that the banking sector has not been able to achieve financial inclusion as much as it should have, and there is a compelling case to think out-of-the-box and promote specialized banks with a targeted agenda rather than allowing another run-of-the-mill commercial bank.
Specialized banks for verticals such as Education loans, SME lending, Microfinance, dedicated bank for lending to start-ups, etc. with healthy capitalization and a strong regulatory support could bring in a positive change to each of these sectors, as these sectors are perpetually starved of capital.  Similarly, a specialized bank for minorities could address the disparities in access to credit, as noted in several widely published studies.
Infrastructure sector lending is another area which needs special focus. India’s infrastructure sector funding needs are in the range of USD 1 trillion; against this, today’s specialized institutions in this sector are lending between USD 2 – 4 billion a year, leaving a wide gap.  The healthy savings rate in the country has to be tapped to fund the infrastructure needs, and a few dedicated banks may be needed just to meet this single policy objective.

Financial inclusion in rural areas is another policy objective that is being met at pace much slower than desired. Big banks, with large overheads, may not be the solution for this despite stipulations on minimum number of rural branches, as many of them perceive this as an ‘obligation’ without any commercial incentive. The solution could lie in smaller banks, with restricted regional presence in under-banked regions; case in point is old private sector banks in Southern states, which have achieved far more in financial inclusion than large banks.   A dedicated micro-finance bank could also be explored to achieve this objective economically, and quicker.  

N. Muthuraman is ex-Director Ratings, CRISIL and Co-founder of RiverBridge Investment Advisors Pvt. Ltd., a boutique financial advisory firm.

This is the blog of the Print Version published in Business Line dated 17th Oct 2011

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