The Reserve Bank of India’s (RBI’s) policy on branch authorisation for banks has been the subject of intense debate in banking circles, and bankers still talk about it in hush-hush tones for fear of upsetting the bosses at the central bank. Foreign banks, for instance, have begun getting used to the fact that the RBI will be particularly tightfisted on granting them permission to open new branches. Typically, if a foreign bank applies for several branches in a given year, the RBI may give it maybe a handful—say three or four. There is also the RBI policy of pushing them into underbanked areas.
The RBI takes into account reciprocity in the home country, WTO commitments and so on while deciding on approvals for foreign bank branches. Foreign bank CEOs are now saying they are fine with going to smaller centres, given the burgeoning business opportunities generated by SMEs there.
But the real problem with the RBI’s branch authorisation policy is the micro-management it does when it comes to approvals. Consider, for instance, the following clause from a January 2006 notification on the subject:
“Banks may proceed with opening of a ‘branch’ which includes all types of offices and off-site ATMs at centres for which permission has been granted in the consolidated letter of authorisation... issued to them in this regard.”
Already, RBI clearance is now a must for setting up new ATMs, but what is worse, the view that any kind of office of a bank is equivalent to a “branch” has begun causing enormous collateral damage.
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| Approving new building plans of banks is not what the monetary authority of a country going for 9% growth should burden itself with |
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In a recent conversation, the CEO of a large private sector bank gave me an interesting example of how this works. Take, for instance, a bank branch that also houses a back-office processing centre above it. If the processing centre work grows and the bank is short of space at that location, it will, willy-nilly, have to look at setting it up elsewhere. And here again, it will have to knock at the RBI’s door. Mind you, the processing centre does not accept deposits, or give loans, or do anything which may even remotely be equated with the operations of branch as we know it. Why, then, must the bank seek RBI clearance for a simple relocation?
Now, consider a situation where, instead of this sort of space re-arrangement, the bank wants to move lock-stock-and-branch to another location that has more space. There again, the branch must, according to the policy, be located within the same “centre” for which the clearance was given. So, either the bank goes to the RBI for approval of a new address for its back-office, or moves the entire branch and back-office within the existing centre to another bigger area. And the latter option can often mean shelling out more money just to ensure that the “centre” remains a single unit. This is appalling, and not just to bankers.
In effect, any space re-allotment that involves going beyond the boundaries of the existing blueprint requires a nod from the RBI. A foreign bank, for example, seeking to move its legal and administrative set-up to another location will also be stuck with those plans, since it will have to wait for RBI clearance even for that. Under high growth conditions, this is a major irritant because working in cramped quarters hits staff productivity.
The question that arises is this: why should the definition of a branch not be more specific? Why should back-office, legal or other operations moving to another location require RBI clearance?
And, on a more macro note, why should a country’s monetary authority, which has other big issues such as inflation management to deal with, worry about back-offices, annexes and other brick-and-mortar aspects of banking operations?
The RBI needs to give up its tendency to micro-manage things which are not central to its role. It’s about time. Approving new building plans of banks is not what the monetary authority of a country going for 9% growth should burden itself with.
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