Will the new bankers please stand up?

 

 

Think of financial ‘inclusion’ in India, and you will invariably discover that financial ‘exclusion’ is far too conspicuous. Digest these for some evidence: out of the 600,000 odd villages in the country, only 5.3 per cent have a commercial bank branch, which translates to one branch catering to 26,000 individuals in rural areas. Even if we take the entire country’s population into consideration, only 40 per cent possess a bank account in India, as compared to 95 per cent in the US! The proportion of people possessing any form of life insurance cover is as low as 10 per cent, while those with a non-life insurance is an abysmally low 0.6 per cent. Only 13 per cent Indians possess a debit card, while the credit card cover is as low as 2 per cent. The most recent National Sample Survey Organisation, 2008, study reveals that out of the 89.3 million farming households in the country, 51 per cent did not receive credit from either institutional or non-institutional sources of any kind. Even where 33 million ‘no-frills’ bank accounts are claimed to have been opened, 89 per cent of these accounts are dormant today, as per KC Chakrabarty, Deputy Governor, RBI.

These statistics are perhaps sufficient to prove the extent of financial exclusion in the country. At the same time, there can be no second thoughts on remedial actions that need to be taken in order to unleash the power of fortune at the bottom of the pyramid. Perhaps, it was an admixture of these very glaring statistics, added to the recommendation of the S.S. Tarapore & Raghuram Rajan committee report that played the motivation pill for the Union Finance Minister Pranab Mukherjee, who promised to take a step towards altering this gloomy state of affairs. In his Union Budget 2010-11 statement, he said, “We need to ensure that the `Indian` banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services.

RBI is considering to give some additional banking licenses to private sector players. Non-Banking Financial Companies (NBFCs) could also be considered...” Strong reason to smile for many, but the celebrations are still miles away, thanks to the dictionary which defines a ‘promise’ and a ‘policy’ very differently! Ever since the banking sector opened up in 1993, the regulator has given out just 12 licenses (of which 10 were given in the first year, while two were given in 2002 to Kotak Mahindra Bank and YES Bank). Therefore, this announcement came as a good tiding to many public, private players and NBFCs (of the likes of Shriram Capital, Sahara, Reliance Capital, the Aditya Birla Nuvo group, Bajaj Auto group, L&T Finance, Tata Capital, Indiabulls, Religare, Exim Bank, IFCI and SIDBI), who have for long, worked on blueprints to make a name in the Indian retail banking arena. To represent the joys at the bourses in numbers, at the end of the Union Budget day, the Religare stock (an NBFC) had inched up by 3 per cent, Aditya Birla Nuvo gained 4 per cent, Reliance Capital grew by 8.1 per cent while Bajaj Auto Finance surged 5.3 per cent. Expressing his intentions in this regard, Sunil Godhwani, CEO & MD, Religare Enterprise, says, “Banking is a natural progression for any integrated financial services player...” As a company official says, “Religare is currently waiting for a banking licence, and at present, talks are on with the ministry.”

The entry of these new players in a sector which at present has 96 scheduled commercial banks [27 public sector banks (which hold over 75 per cent of the total assets of the banking industry), 31 private banks and 38 foreign banks], with a combined network of over 53,000 branches, will not only increase competition and dilute PSU involvement, but will force some change in the functioning of the banking domain as a whole. But despite hopes that these new banking aspirants will increase penetration of banking services in the country (only 6.4 per cent of the branches of new private banks are in rural areas), the question is: are they prepared yet?

Under the current guidelines, a new private sector bank should have a minimum net worth of Rs three billion, and no single entity or group of related entities can hold more than 10 per cent in a bank. There is a distinct possibility that RBI may increase the minimum net worth limit to at least Rs five billion, but many participants are confident of making the cut; one of whom is Ajay Srinivasan, CEO, Birla Financial Services, who says, “We welcome this initiative and will definitely apply for a licence. We are confident of meeting any eligibility criteria that might be set.” While talking about the change in the eligibility criteria for these new entrants, Usha Thorat, Deputy Governor of RBI says, “We have to work on it. It’s a long process and will take some time.”

Evidently, RBI is not pleased with Pranabda’s positively eager approach on opening up; and however hard the Ministry of Finance may try, RBI has historically been known to have the wherewithal to pull the plugs where necessary. How long before this ‘promise’ becomes a ‘policy’? Two years is our estimate; earlier is our hope; right now is an impossibility – forget it!