Editorial: Banking on niches

Apr 04 2014, 03:04 IST
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SummaryDifferentiated banking is the need of the day

The banking landscape in the country has changed dramatically since the Reserve Bank of India (RBI) awarded ten new licences in 1993, and two more in 2001; state-of-the-art technology has allowed customers to transact far more easily and has given them access to a whole range of services. However, it is by and large urban India that has benefitted from the increased reach, although it is a fact that most identified unbanked villages, with a population of more than 2,000, are now covered by a banking outlet. Most villages, however, don’t have a branch; their access to banking services is primarily via Banking Correspondents (BC) because setting up a branch in these hamlets would simply not be remunerative enough—just 15% of villages have a bank branch. It is against this backdrop that an in-principle banking licence for Bandhan Financial Services the West Bengal based microfinance institution, should be welcomed. The organisation has demonstrated its skills at lending in rural and small-town India with 56 lakh customers and an outstanding loan book of close to R6,000 crore and RBI has done well to allow it to mobilise deposits, which should not be too difficult. Once Bandhan is able to build a large enough deposit base, its cost of funds will drop sharply allowing it to lend at significantly lower rates than the current 23%, thereby making a loan affordable for millions more.

Bandhan’s becoming a bank heralds a new era in Indian banking, one in which there is a variety of lenders; differentiated banking is required, not just to further financial inclusion, but also because the economy needs specialised lenders.

The other institution that has won an in-principle approval from the RBI, to set up a bank, is IDFC, a non-banking financial company (NBFC) that focuses on the infrastructure space, again a niche player. Although IDFC may not want to stay specialised and will look to be an universal bank, it is unlikely it will altogether abandon the infrastructure domain. As the Nachiket Mor committee suggested, there can be a whole host of banks including payments banks, a national consumer bank, a national infrastructure bank and a national wholesale bank. The central bank has said it intends to have various categories of licences which is the right way to go about increasing financial intermediation. However, none of these models has been tested which is probably why almost all aspirants want to

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