Licensing of new banks welcome

The guidelines issued by the Reserve Bank of India for licensing of small banks and payment banks have been generally welcomed. Many prospective candidates have already started work on their applications. These institutions will add another tier to the present banking system and are aimed at greater financial inclusion.

There are large unbanked regions and segments of population and it has been the policy of the government and the RBI to extend banking facilities to all of them. The Jan Dhan scheme launched by the prime minister is being pursued vigorously but that will still leave out large numbers of people.

The RBI has been keen on working out a local area bank model which would serve specific sections of people and cater to their needs. The new norms are meant to make that idea more real and useful.

The small banks will be in a position to frame savings schemes that suit the financial position of weaker sections of people, offer credit to small business units according to their requirements and provide remittance facilities to migrant workers and low income segments.

Bigger banks with nationwide operations may not be in a position to do that. The RBI had earlier proposed geographical limits for the functioning of the small banks but it has relaxed that constraint in the new norms. The requirement that not more than 50 per cent of the loans should be given to those borrowing more than Rs 25 lakh will ensure that big borrowers do not corner much of the available credit.

A total of 75 per cent of the loans have to be advanced to priority sectors like agriculture and small business. This will force the banks to stick to the primary purpose for which they are formed.

Payment banks are an innovative idea built on an existing system of financial transactions. Some service providers like mobile phone companies offer payment services through mobile wallets.

The mobile wallet business has tripled in the last two years. The service providers have to depend on banks for the transactions but if they have a banking licence they can do them independently and save costs.

There is a view that some regulatory norms liked CRR and SLR requirements, as in the case of other banks, will constrain the small banks. But these are safeguards that are needed because the customers are more vulnerable than the average bank customer. The chance to enter the banking field is likely to be grabbed by many entities which did not get new licences earlier this year.

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