By January 2016, anywhere in India, one would need to walk just 15 minutes to access a kiosk to deposit or withdraw cash of any amount to and from one’s bank account and transfer balances from one account to another, in a secure environment, paying reasonable charges. The Nachiket Mor panel on financial inclusion has envisaged this scenario. An audacious dream, considering the fact that in 2011, in every 1,000 sq. km, India had 30.43 branches and 25.43 ATMs. International Monetary Fund’s financial access survey puts the comparative figures for China at 1,428.98 and 2,975.05, respectively.
To spread banking services, the panel has recommended setting up a special category of banks called payments banks with a minimum entry capital requirement of Rs.50 crore, one-tenth of what a full-service bank requires, since they will have a near-zero risk of default. Existing banks should be permitted to create payments banks as subsidiaries, the panel said. It also spoke about a new kind of wholesale bank.
The underlying message of the panel is clear—let a hundred banks bloom in Asia’s third largest economy where 40% of the adult population does not have access to banking services. There are 105,753 branches of all scheduled commercial banks in India and more than one-third of these—39,336 branches—are in rural India. Apart from the state-run and private banks, there are 1,618 urban cooperative banks, 82 regional rural banks, 31 state cooperative banks and 370 district central cooperative banks. Then, there are 92,432 primary agricultural cooperative societies with single-branch operations. Finally, there are 12,225 non-banking finance companies, of which 254 take deposits and 418 are systemically important, with an asset base exceeding Rs.100 crore.
But these are not enough and we need more banks of different sizes and different kinds to spread financial inclusion. The US, with a population of 313.9 million, in contrast to India’s 1.237 billion, has 8,100 commercial banks, 1,200 savings and loans associations, and 12,000 credit unions. The buck stops at the Reserve Bank of India (RBI).
India’s banking regulator has been miserly in giving licences to new banks. In the past two decades, it has given licences to 11 new banks and allowed one cooperative bank to convert itself into a full-service commercial bank.
Currently, an expert panel under former RBI governor Bimal Jalan is evaluating the credentials of 25 aspirants, including a few corporations. At least one business conglomerate has withdrawn its application for a new bank licence as it did not find the regulations suitable; quite a few others did not seek a licence.
This will be the third round of new banks since India opened up the sector in 1994 and this time around the finance ministry took the initiative and not RBI. In fact, when former finance minister Pranab Mukherjee announced in his 2010 February budget that the country would give licences to corporations and non-banking finance companies to set up new banks to spread banking services, RBI was pushing for consolidation in the sector. Since the announcement, almost four years have passed. Even if RBI announces the names of successful candidates in the next few months, it will take at least a year and a half for the first new bank to be set up. I am not sure whether this is procrastination or reluctance but the fact remains that India’s banking regulator is not excited about the idea of seeing more banks coming up.
Incidentally, RBI governor Raghuram Rajan has been talking about differentiated banking licences for specific banking activities and banking licence on tap. If indeed he walks the talk, the banking landscape will change in India, where mobile connections outnumber bank accounts.
Even in urban pockets, many do not have access to banking services simply because they cannot meet the so-called ‘know your customer’ (KYC) norms of banks. The Mor panel in its report has spoken about a universal electronic bank account (UEBA). By January 2016 each Indian resident, aged 18 years and above, should have an individual, full-service, safe, and secure UEBA. They will be issued such an account automatically at the time of receiving their Aadhaar number by a high quality, national, full-service bank. The panel has recommended that RBI make it clear that no bank can refuse to open an account for a customer who has adequate KYC documents, which specifically include Aadhaar.
This, to some extent, addresses a critical hurdle that one faces while opening a bank account—KYC—even though the panel has not explicitly touched upon the issue of account portability. In 2011, the government allowed portability of mobile numbers and health insurance policies but inter-bank account portability is still a far cry. It is in place within a bank as banks now allow transfer of accounts from one branch to another without insisting on opening a fresh account or making customers undergo the KYC process again. Till 2012, banks used to insist that customers go through the account opening procedure all over again if they wanted to shift to a different location since the account holder’s information was maintained with local branches. Since most bank branches are now on core banking solutions, through which all account holder information is maintained in a centralized database accessible across branches, the home branch concept has become irrelevant.
A technical committee of the central bank examined inter-bank portability of account numbers but found it not feasible even with the implementation of a 26-character international bank account number that facilitates transactions based on a single input. We should not be obsessed with portability of account numbers, as unlike mobile numbers that others need to know, a bank account number is a private figure that only the account holder should know.
