The annual monetary policy statement for 2010-11 laid out few details about RBI?s approach to granting licences to new private sector banks, something that was announced by the finance minister in his Budget speech. Unfortunately, RBI seems unenthusiastic and this raises the question whether yet another effort to unleash competition and improve access to the banking sector will come to a naught. The reason for such pessimism is the lackadaisical response of the central bank to what should have been a top priority for reforms in the banking sector. The roadmap laid out in the annual policy statement proposes to first prepare a discussion paper by the end of July to look at a wide range of licensing issues like international practices, the Indian experience, and the ownership and governance guidelines. This is with the apparent purpose of generating a debate and securing wider feedback.
This is to be later followed up by consultation with all stakeholders to finalise the guidelines. And what is even more bizarre is that the banking regulator also wants to set up an external expert group to examine all applications and make recommendations for granting licences. The lack of a proactive approach is not surprising, given the convoluted approach that the central bank has historically adopted to consistently thwart the recurring demands for a more liberal approach to bank licensing. The first major effort to allow entry of new players in the banking sector after the start of reforms was initiated in the early 1990s when RBI gave approval to a dozen-odd new private banks, of which some like the ICICI Bank and the HDFC Bank became major players in a short period of time.
Later in the mid-90s, the central bank made an apparently more ambitious attempt when it pushed forward with the local area bank (LAB) concept to improve banking services in both the rural and semi-urban areas. Although the LAB scheme, which envisaged a minimum capital of Rs 5 crore and an area of operation across three contiguous limits, met with enthusiastic response receiving as many as 227 applications, only 6 LABs were actually licensed by RBI. Of these, two have ceased operations and now only four operate. The last big name to gain entry was the Kotak Mahindra Bank, which secured a licence in the early years of this decade.
This tightly restricted entry policy and the high attrition of the weaker banks has shrunk the number of commercial banks in the Indian banking sector by almost half through the current decade from 300 in 2001 to just 170 in early March 2010. And although the number of total bank branches has climbed up marginally from 67,937 to 82,408 during the period, the network in the under-serviced rural sector has declined from 32,585 to 31,699 during the period.
But what is of deeper concern is the inability to muster courage for a radical review of the licensing policy, despite the highly skewed distribution of bank branches and the lessons of the gains from greater competition during almost two decades of reforms. In fact, banking facilities across large swathes of the country are much lower than even what the dismal all-India numbers show. Still, the regulator has been unable to respond to the situation with any enthusiasm. In fact, the most recent data published by RBI for 2009 shows the uneven growth that has impacted the availability of banking services in many states.
For instance, while each bank office, on an average, served 4,378 persons in Chandigarh and 4,937 in Goa, the availability of services declined substantially in the more disadvantaged states, with the population served per office going up to 39,088 in far flung states like Manipur and 30,611 in poor but politically important states like Bihar.
The disparities in per capita deposits and per capita credit were even sharper. While per capita deposit was above Rs 2,50,000 in places like Chandigarh and Delhi, it was just Rs 7,373 in Manipur, Rs 7,399 in Bihar and Rs 14,573 in Rajasthan. The difference was even larger in the case of availability of credit. While per capita credit was the highest in Chandigarh (Rs 2,85,863) and Delhi (Rs 1,89, 451), it was among the lowest in Bihar (Rs 2,017) and Manipur (Rs 2,929).
Such glaring disparities in the availability of banking services has encouraged various committees to support the revival of the LAB scheme, including the Khan Committee on rural credit and micro finance in 2005, the Rangarajan Committee on financial inclusion in 2008 and the most recent committee on financial sector reforms by Raghuram G Rajan in 2009. But will RBI listen?
?p.raghavan@expressindia.com
