Stalled at 15 km

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India has 6,00,000 villages and 45,000 rural bank branches. Obviously, this is not enough; 60% of India’s rural population doesn’t have a bank account. Overall, 40% of India is ‘unbanked’. This is shameful, and financial inclusion—jargon for getting more people into the financial system—is a high-priority policy goal. RBI has a committee on financial inclusion. One idea is that since setting up more branches affects banks’ profitability, mobile bank staffers, called business correspondents, should take banking to people’s doorsteps. Banks come to people, as it were. But the central bank has issued a guideline that all but makes this idea a non-starter—it has ordered that the distance between business correspondents and base branches can’t be more than 15 km. This is breathtakingly illogical and a scary example of its lingering licence raj mentality. RBI justifies the rule citing oversight requirements. But why should oversight work, in these days of cheap universal connectivity, only when the distance between the branch and the mobile officer is not more than 15 km?

Restricted to the 15-km distance, the business of bankers at doorsteps excludes the most innovative companies—private banks and private non-banking financial companies that specialise in micro finance but do not have rural branches. Interest has been expressed by these entities in the business correspondent model. But with RBI’s guideline, only public sector banks with existing branches in rural and non-metro areas can realistically offer the service. So, the guideline is anti-competitive as well. There are other restrictions, too. Only banks can pay the fees of business correspondents. This creates difficulties for modern non-banking companies that have the expertise to set up and maintain virtual banks for small customers. RBI should have had a minimalist intervention policy and encouraged a whole range of financial businesses to participate in this. How would Indians without bank accounts suffer if a financial company based in, say, the South, offers services in the North? But maybe we are asking too much of an RBI that even likes to control banks’ ATM maps. RBI is one of India’s least-reformed institutions. This has extracted costs. The biggest cost may come now—millions being denied bank accounts.