An account for everyone is a noble objective. But it is not the RBI’s mandate.
The RBI panel on financial inclusion reinforces a traditional and outdated central planning approach to financial inclusion. The vision — in this case, of every adult Indian having a bank account by 2016 — may be a noble one, but it is no different from the paternalistic formulation which says that the state or central planner knows what should be consumed by each consumer and then licences are given to those who produce those goods. In this case, the good is bank accounts. Each Indian must hold one, we are told, and she must have an Aadhaar card which is linked to it. And society, that is, other consumers, must pay for it. Here, the decision that bank accounts are good and better than mobile wallets, or money market mutual funds, is that of the central bank. Society must bear the costs of this vision of the central planner.
One important cost is for bank lending rates. The big reason why ordinary lending rates are high is that rates are mandated to be low on priority sector loans. Ordinary businesses have to suffer because some sectors are being subsidised. Raising the priority sector lending (PSL) requirement would mean that ordinary borrowers will now have to pay even more. And to the extent that banks suffer losses because of these loans, taxes will need to be raised for ordinary people to restore banks’ capital. This will all be done non-transparently. The tax payer will only be told that he is paying for the noble cause of keeping public sector banks alive.
Also, with restricted entry, and with a PSL/inclusion mandate, banks have no incentives to expand anywhere. If a bank wants to expand, say, in Bangalore, because business is booming there, for every three branches it opens there, it will need to open an unprofitable branch in the middle of nowhere. Also, it would need to make half of its new loans to priority sectors. So, it decides that it’s not worthwhile to expand. And therefore the financial sector remains small and uncompetitive. Is this really a good development strategy? The report lists business models for banks. This is not the role of the RBI. The RBI should ensure the safety and soundness of banks, and not try to carry out the agenda of the UPA or the NAC.