Offer incentives, not force the policy

Written by K Cherian Varghese | Updated: Jan 28 2008, 04:46am hrs
We have moved a long distance, happily, in the right direction from the restrictive banking regulation of yesteryears. But branch expansion continues to be regulated. Each bank is allotted a certain number of branches to be opened. While 50% of the branches could be opened at urban and metro centres, the other half has to be located in rural and semi-urban areas. There is also a restriction on the number of branches that can be opened at each centre. These are relaxations unthinkable in the earlier years.

Banking is a business that is regulated all over the world. The acid-test for any regulation should be, whether it serves the interest of the stakeholders on a sustainable basis and facilitate the long-term viability of the regulated entities.

Branch expansion by banks provides convenience to customers to avail themselves of banking services from more than one location. The time saved by transacting at a branch nearby can be used by customers for other productive purposes (as a nation, we are yet to put a value on time). The convenience in banking business will provide the requisite competitive edge to enterprises and individual customers.

Banks should be able to open branches where they think there is potential to do business. Stipulating centre-wise allocation and compelling banks to go to areas they consider hopeless vis--vis business potential needs a review. A positive step of inducing banks to go to such places could be by way of offering incentives rather than the use of the licensing policy regulation.

There are residential areas and shopping malls where customers require banking services. Such locations could be served by small outlets like extension counters. However, the licensing policy allows the opening of an extension counter attached only to an institution and that too with many conditions.

The licensing policy also requires that extension counters should only transact in deposits. This compels a customer to go to the main branch of a bank even for a small loan. In the core banking environment, there is no difference between an extension counter and the main branch. Extension counters could be made mini-branches where any type of transaction could be undertaken according to the convenience of customers and the branches.

Banks have now a large ATM network. Even these are considered as banking units, but no transaction other than cash withdrawals and cash or cheque deposits are permitted at any one of these outlets. Banks have built their ATM networks at a considerable cost, which includes rents of premises at premier locations. If all these ATMs are convereted to mini-branches, there will be a banking revolution in the country as customers will be able to access service outlets in their neighbourhoods and banks will be able to generate more business from the infrastructure they have already created. The Reserve Bank of India may resist the temptation to preserve the type of business to be undertaken or the staff complement at these ATM-converted mini-branches.

The RBI as the central bank of the country has the vicarious responsibility to ensure that the banking system remains healthy to serve our national interests and protect the savings of our depositors. It goes to the credit of the RBI that the Indian banking system remains robust and healthy, while the so-called developed economies with sophisticated risk management systems are shivering under the impact of the subprime flu.

The RBI has been liberalising the controls gradually in step with its conservative and prudent tradition. It has administered a test dose of the liberalised branch licensing and we can expect more from it provided the banking system responds with caution and maturity.

As for foreign banks, the RBI needs to continue with the present policy of reciprocity in Indian banks being permitted to open branches in their host countries. In respect of domestic banks, that is banks with more than 51% domestic equity, it is time there was a further review of the branch licensing policy. The parameters to become eligible to open a certain number of branches annually may be announced so that banks strive to attain these qualifying standards. At that stage, the RBI needs to do away with the restrictions on the centre-wise opening of branches so that primacy is given to customer convenience and profitability of banks.

The writer is a former chairman & managing director of Union Bank of India. These are his personal views