The Reserve Bank of Indias (RBI) insistence that banks must provide a no frills alternative that makes banking accessible to all, stems from the central banks confusion over a fundamental issue: are banks commercial undertakings or are they vehicles for effecting socio-economic change. If it is the former, RBI should leave it to banks to offer whatever service they find profitable. If it is the latter, then banks should be told to stop worrying about hum-drum things like profits and capital adequacy and focus, instead, on loftier goals like uplifting the poor. The problem is RBI wants to have it both ways.

In the pre-reform days, there was no such dilemma. Profits were a dirty word, quite alien to the world of public sector banks (PSBs). Reforms changed all that. At least, it was meant to. PSBs were told (if not in so many words) that they must function as commercial undertakings. Consequently, like foreign and private sector banks, many PSBs began charging for services theyd earlier rendered free. At the same time, since it is much more expensive to service a large number of accounts with small balances, many of them also began discouraging small depositors by insisting on maintenance of a higher minimum balance than in the past. In the process, it is possible, many customers wanting to avail of the services of a particular bank were not able to and had to go elsewhere. But what is wrong with it As long as there is demand, the market will always provide the product or the service. And, provided there is competition/markets are contestable, at a market-clearing price. That is the beauty of the market. So instead of insisting that an Oberoi or a Hilton should also serve a janta thali, what is important is that if there is demand for a janta thali, there should be no impediment to anyone else providing it.

Remember, low-cost airlines made an entry, not because government insisted that airlines provide a cheaper alternative, but in response to a felt need for cheaper flights. They realised thats where profit opportunities lie. So too with banks. Till even a few years ago, who would have imagined that the likes of a Citi or an ICICI would set up shop in middle-class colonies to hawk their housing loans/car loans or credit cards. They do so now because they see a market there. So rather than insisting on what products banks should offer whom, leave it to the market! Or else forget about reform.