Small Banks Mark Big Step for Inclusion





The RBI must iron out regulatory wrinkles

With the licensing -in principle, as yet -of 10 small banks, in addition to 11 payment banks last month, the RBI is finally beginning to walk the talk on financial inclusion. India can do with many more such banks and the RBI should issue yet more licences without waiting to assess the experience of the entities already licensed. The only prerequisite is proportionate beefing up of the central bank's own regulatory capacity . The immediate focus must be on ironing out regulatory wrinkles that are bound to come up as the new banks get going.The guidelines demand that the new banks meet cash reserve and statutory liquidity ratio norms from the word go. Similarly , all RBI norms on setting interest rates that apply to commercial banks will apply to the small banks. However, given the distributed nature and small ticket size of their loans, the small banks' costs will be higher than commercial banks'. Granted, the ability to raise deposits will lower their cost of funds, as compared to the cost when they were microfinance entities, but the operational costs remain unchanged. Small banks cannot be expected to maintain the same gap between their base rate and their top lending rate as banks do. To demand such things is to make these banks unviable. The present RBI norms on sharing bank ATMs work against new entrants: their customers will use other banks' ATMs far more than those banks' customers will use the new entrants' ATMs, forcing the small banks to make hefty net payments to the big ones, even as the big banks' payout and receipts from one another cancel each other out. A huge expansion of white-labelled ATMs is called for.
Given the desperate need of the global venture fund industry to find profitable deployment, the small banks could, with their near-perfect recovery rates as microfinance entities, attract huge dollops of cheap money . It would be a shame if regulatory restrictions on foreign funding prevents global capital from reaching the country's poor even as it is allowed to subsidise middle-class consumption through assorted investee startups.
Source: Economic Times, 18.09.2015