Opinion Being bank friendly
RBI guidelines will help enhance financial inclusion. But there is scope to make them less restrictive
The Reserve Bank of India has released guidelines for the licensing of small finance banks and payment banks to deepen financial inclusion in the country. These banks are intended to provide access to savings vehicles, supply credit to small business units, provide small savings accounts, and allow remittance facilities to the migrant-labour workforce and low-income households. In a vastly under-banked country like ours, any move to deepen financial inclusion is welcome. The guidelines do well to allow a wide category of eligible entities to apply for licences. The promise to allow licences on tap from next year is another welcome move.
The guidelines for payment banks may be of particular significance to a number of payment service providers, such as mobile phone companies, that offer payment services through mobile wallets. With their wide network coverage and existing infrastructure, they may be well placed to benefit from this licensing regime. Currently, payment service providers have to tie up with banks in order to provide services. Once they are able to get a licence as a payment bank, the costs of doing so are likely to drop.
There are, however, some deeper regulatory issues emanating from this announcement. One is the basic rationale for creating differentiated banks. The guidelines explicitly restrict the business of payment banks and small finance banks to precisely that — payments and small finance. It is not clear why such banks are being restricted from performing other financial services. Many other restrictions, such as CRR and SLR requirements for small finance banks (at par with commercial banks), are also likely to affect the long-term business viability of such entities. There are also restrictions on the quantum of loans that such banks will be able to issue (at least 50 per cent of loans should be up to Rs 25 lakh). Such restrictions reflect a multiplicity of prerogatives (excessive reliance on capital requirements rather than better supervision) that are sought to be achieved at the probable cost of undermining the business proposition that the new licensing regime offers. Rather than create another mandate-driven system, the RBI must consider the financial incentives for firms seeking to enter this area, and the long-term benefits of competition that may help achieve financial inclusion.
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