This is where the Banking Laws (Amendment) Bill, passed by the Lok Sabha after the finance minister dropped the controversial commodity futures clause, is so important. Theoretically, foreign banks can be expected to plug in the shortfall, but its not clear how many banks would be interested in venturing out beyond the larger cities. India clearly needs more banks, both for the capital they will mobilise and the new product innovations they will bring. Indian banks may not have higher NIMs than their counterparts in comparable countriesthis impression is due to the different way in which they report NIMs, ours include the provision costsbut competition cant hurt. There can be little doubt that, in several under-banked areas, other financial intermediaries have done a better jobwhether in niche commercial vehicle financing or in financing poor villagersbut given these worthies also get their money from banks, the logic of getting in more firms who can mobilise more funds remains a strong one.
Past experience with new licences has been mixed but now that the central bank will be armed with powers to supersede the boards of banks and inspect the books of banks subsidiaries and associatesthat is why RBI insisted it will not move on new licences till the Banking Bill was passedthis may be less of a problem in future, though the R500 crore minimum capital requirement for a new bank does seem low. There is little point having strong new banks if the older ones continue to be weak, and the finance minister has done well to state that consolidation among the PSU banks, large and small, is something that may be desirable.