RBI allows free branching in Tier-3 to Tier-6 cities

Written by fe Bureaus | New Delhi | Updated: Oct 28 2009, 05:53am hrs
RBI on Tuesday allowed domestic scheduled commercial banks to open branches freely in Tier-3 to Tier-6 cities, having a population of up to 50,000. The central bank also announced the constitution of a working group to examine a proposal of making the priority sector loan portfolio of banks tradable. FE first broke this news in its Oct 26 reportfree branching tops banking reforms plan.

Banks may plan their branch expansion in these cities in such a manner that at least one-third of these branches are in under-banked districts of under-banked states, RBI said. Domestic scheduled commercial banks (other than RRBs) will now be free to open branches in Tier-3 to Tier-6 centres, as identified in Census 2001 (with a population up to 50,000) under general permission, RBI said in its mid-term review of the monetary policy.

Corporation Bank CMD JM Garg said the move will help banks cash in on opportunities in cities like Solan, Rishikesh and Mundi. It will also facilitate financial inclusion plans of the government. RBI announced the relaxation based on a report submitted by a working group, chaired by P Vijaya Bhaskar. The opening of branches in Tier-1 and Tier-2 cities will continue to require prior authorisation, RBI said. The central bank also added that this will be one criterion for considering SCBs proposals to open branches in Tier-1 and Tier-2 centres. In considering such proposals, the Reserve Bank will, in addition, take into account banks performance in financial inclusion, priority sector lending and the level of customer service, among others, it said.

On launching priority sector lending certificates, as suggested by the Raghuram Rajan committee on financial sector reforms, RBI has decided to constitute a working group. This will help banks achieve the priority sector lending target.

According to the committees recommendation, PSLCs would be issued by registered lenders such as MFIs, NBFCs, co-operatives, and registered money lenders for the loans granted by them to the priority sector, and also by banks for the amounts in excess of their stipulated priority sector lending requirements.

These certificates could be traded in the open market, and banks falling short of meeting the priority sector lending targets can buy such certificates and thus meet the priority sector lending norms.