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Banking overhauling or reorganisation?
Bankers and the Indian corporate sector, have been waiting with bated breath for the regulator to issue new banking licences.

A discussion paper, Banking Structure in India: The Way Forward, prepared by the Reserve Bank of India was released in August 2013. A committee with Dr. Bimal Jalan in chair has been appointed to scrutinise the application discussion.

Recognising the need for extending the reach of financial services, the paper begins with the assertion that “today’s banking structure in India has both the need and scope for further growth in size and strength”. That being so, there should have been no delay in bringing new players into the scene.

Owing to historical reasons, Indian banking has become a conglomerate of banks of different sizes and pedigree. They range from too small banks, not too big banks of international standard, century-old cooperative sector patronised by the state, young private sector banks and to state-owned banks having pan-India presence.  In the re-orientation of the banking structure, there are four tiers.


Local banks

Local Area Banks(LAB) and small banks will be the fourth tier. When the stipulated capital requirement for the new banks is Rs.500 crore, tiny banks with Rs. 5 crore may not be able to remain in business. LABs are a disaster; their operation is limited and the capital base is low. The well-managed and financially sound ones would have opportunities to expand their area of operations. In their current stature, these banks cannot be expected to become very effective credit agencies as the discussion paper itself has conceded that the cost-income ratios of the 4 LABs ranged from 59 to 87 per cent as on 31 March 2012. These banks can merge with bigger banks, if they wish. Their merger with the gramin banks could be one of the feasible solutions.


Regional banks

In tier three, there would be gramin banks, old private sector banks and multi-state urban cooperative banks. Conversion of multi-state urban cooperative banks into commercial banks is one of the propositions suggested. Raising the capital of Rs.500 crore, however, would be a difficult task for them.


National banks

National banks, besides the subsidiaries of foreign banks incorporated in India, would be in tier two. Voluntary merger of banks to enlarge their size is the mode suggested. All the nationalised banks today have a network of over 1000 branches. However, their branch composition deprives them of the level-playing field compared to the foreign banks, which handle larger volume of business, generating higher amount of profit. Amalgamation of two public sector banks can increase their size, but not necessarily their competence. The large number of small rural branches, which make very little contribution to their overall profitability, would remain as the speed-breakers. Therefore, specialised banks may have to be created to compete with the foreign banks in the domestic market.


International banks

It is desirable to foster three or four very large banks of international standard through merger of some of the present biggies. State Bank of India, Bank of Baroda, Bank of India and ICICI Bank have good presence in the international banking space. Promoting a strong international bank by them jointly is feasible.  Foreign banks are eager to expand their branch network in India as their Indian operations are found to be highly remunerative. Of late, they are moving into smaller towns. Indian banks have to gear up to face the competition from these banks.


Entry of new banks: earlier the better

An important omission in the discussion paper is the necessity of fostering new banks in the third tier, specifically to extend banking facilities to the North-Eastern states. A big bank operating from Guwahati with extensive branch network in the eight NE states and about 25 per cent of its branches in the major banking centres in the rest of India could be helpful in mitigating the regional inequalities in the availability of banking facilities.

There are 26 applicants, including Tata Sons, Reliance Capital and Aditya Birla Nuvo. From the public sector-India Post, LIC Housing Finance and IFCI. Other finance companies include L&T Financial Holdings, Bajaj Finserv, Shriram Capital, J M Financials, Relegare Enterprises, Magma Fincorp, Edelweiss Financial and Muthoot Finance. Micro finance institutions like Bandhan Financial Services and Janalakshmi Financial. India Post and UAE Exchange are the strong contenders in the race.

There is a need to finalise the list of new bank licences quickly.

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