FE Editorial : Financial exclusion

Written by The Financial Express | Updated: Oct 30 2009, 03:50am hrs
If there is one place where the licence-permit raj in India continues to flourish, it is in the financial sector, with RBI playing the role of apex arbiter. Tuesdays credit policy review took an important, even if small, step towards dismantling that licence raj in the sphere of expansion of bank branches. Curiously enough, in a reminder of the old days of quantitative controls for industryfirms had to take permission from the government before expanding capacitybanks were required to seek permission from RBI to open additional branches. Now that requirement has been relaxed for Tier-3 to Tier-6 citiesthe former is classified as having a population of 50,000. This is a good move for both banks and customers. People in smaller cities, even villages, will finally have an opportunity to be financially included and will be able to open bank accounts more easily. Banks will be able to tap business opportunities in abundance in parts of India where they havent set foot so far. Fortunately, RBIs decision applies equally to all scheduled commercial banksthere is no special treatment for PSU banks. Ironically, though, RBI hasnt chosen to liberalise similar norms for Tier-1 and Tier-2 cities. Here, banks will have to continue to seek permission, a completely unjustified anomaly in the process of liberalisation.

RBIs control mindset has on earlier occasions too damaged the cause of financial inclusion. RBI took a baby step towards allowing business correspondents to operate on a mobile basis and actually travel beyond branches to open accounts. By restricting the area of operation to 15 km from a branch, RBI unnecessarily put a spoke in the wheel of a very good idea. Globally, even in relatively under-developed economies like Kenya, governments and central banks are permitting newer and more innovative ways to foster financial inclusionbanking through mobile phones is big draw in Kenya. For a country like India, which is endowed with superior skills in information and communication technology, it is a shame if we choose not to use technology to further financial inclusion. RBI must surely give up its innate conservatism and let more Indians gain access to modern banking and finance. The central problem with RBI, like the government until liberalisation in 1991, is that it confuses regulation with control. Of course, banks and financial companies need to be monitored and regulated for standards and transparency, but that can easily be done without imposing sledgehammer controls. Governor Subbarao and his team have taken the first tentative steps to easing quantitative controlsthey must think bigger and bolder.