FE Editorial: The bank is closed

Written by The Financial Express | Updated: Nov 3 2009, 01:25am hrs
Compared with almost any other industry in India, banking is ridden with anti-competitive policy. It is essentially impossible to start a new bank, foreign banks are prohibited from competing in India, and existing banks have to take permissions to open branches. The lack of competition is a critical element of diagnosing why India has such a low quality banking industry, with poor services and high prices. A series of expert committees, most notably the Percy Mistry and Raghuram Rajan reports, have criticised these barriers to competition. Such a policy framework was consistent with India of the 1970s, but is now out of touch with the ethos of modern economic policy. Governor Subbarao has made two important changes to this gloomy picture. First, the setting up of ATMs has been delicensed. Second, setting up branches has been delicensed other than in Tier-1 and Tier-2 cities. These tentative moves raise four interesting questions. First, a few years ago, Standard Chartered had asked RBI whether it could open 200 rural branches. This request was turned down. Will this request now be viewed favourably, since RBI is no longer in the business of preventing banks from opening branches in rural areas Second, why should citizens of Tier-1 and Tier-2 cities be denied the benefits of competition which are being given to other locations When will branch licensing be completely removed

Third, what will be done about opening up entry into banking Indian customers of banking services today have three bad choices. The PSU banks do not know how to deliver good services to customers. The foreign banks have been prevented from setting up adequate distribution. This leaves just a handful of choices such as ICICI Bank, Axis Bank, HDFC Bank. These banks are faltering on many aspects of customer service: precisely because they face no competition. In every other walk of life in India, competition has come about and the benefits are visible. Would RBI now allow a private equity fund to put down Rs 100 crore in equity capital and start a bank Fourth, the most important way to rapidly get high quality capabilities into Indian banking remains foreign banks. All foreign banks, put together, are permitted to open 18 branches a year. Removing this licensing requirement remains the most rapid way to improve the quality of banking services obtained by citizens. How and when will foreign banks be able to open branches in India based purely on commercial considerations, without distortions caused by the government The reciprocity argument, often given by Indian private bankers, is not the point. Even if other countries are silly enough to stop Indian banks from opening branches, we should be smart enough to be more open.