Opinion A bank is born
New approvals are welcome. But the RBI will have to step up its regulatory game.
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The RBI granted “in-principle approval” to two of 25 bank licence applicants on Wednesday. This set of approvals has come after the bank licencing machinery was put in motion four years ago and ends the decade-long wait for new licences. After the Narasimham committee recommended opening up the commercial banking sector in 1991, 10 private banks were given licences in 1993-94 and another two in 2002-04.
While the RBI’s prudence is welcome, the pace at which new banks have been licenced so far is not good enough. Vast swathes of the population are out of the net of formal banking — only one in two Indians has access to a savings bank account, and only one in seven to bank finance. The move towards an on-tap licencing mechanism is welcome — this is the only way to increase the penetration of financial services. But as more private players enter the market, the RBI will also have to step its game up as far as microprudential regulation is concerned.
The RBI’s caution in granting licences to corporate houses and brokerage firms — because of possible conflict of interest issues — and its acknowledgement of the need to think more deeply about licencing India Post are also heartening signs. They indicate the scope of a differentiated licence framework, as proposed by the Nachiket Mor committee.
But the increase in private banks — and therefore in innovation and the use of technology — will call for the RBI to improve its regulatory capacity. The business of banking involves high levels of leverage, which makes it potentially very risky. With greater competition, the RBI needs to evolve higher levels of consumer protection and stronger microprudential regulation. It must increase its supervisory capacity.
The FSLRC’s proposal to set up a resolution corporation, so that if a bank fails, the taxpayer does not have to bail it out, should be implemented. PSU banks, which account for 75 per cent of all banking assets, are implicitly sovereign guaranteed. So the urgency for watertight, sophisticated regulation is diminished. But once diverse private banks flourish, the RBI will have to stay one step ahead of the game. It certainly won’t be an easy task.
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