Issue of new bank lincences

The finance ministry is correct when it says that the Reserve Bank of India (RBI) should not curb foreign investments in new banks at 49%. Today, foreign investors can hold up to 74% stake in established banks; so, a lower ceiling for new banks will make no sense.

Instead of making sectoral rules simpler and more transparent, the RBI's suggestion, if turned into policy, will create extra clutter with two different caps on overseas investments in the same sector. The government is also correct to specify that real estate companies should not be allowed into banking. The world over, real estate markets are subject to long-duration business cycles, which on the downturn have been known to destabilise entire economies. This happened in Japan in the 1990s and more recently in Europe and the US.

Besides, India's real estate market is notorious because it is a sink of cash transactions and there's a very real fear that realtors could turn banks owned by them into money laundering machines. So, allowing real estate companies to start banks will be a recipe for the perfect economic storm and the RBI and the government are correct to be wary of such a possibility.

Less than half of all Indians have access to a bank account. This is a shame, in the second-fastest growing big economy in the world. For many years, inclusive banking has been talked about, but little has happened to push banking deeper into India's hinterland. Low levels of literacy combined with the mass of paperwork that all banks need to open and operate accounts contribute to the low penetration of banking.

The lack of urgency demonstrated by commercial banks to open branches and services in rural India adds to the problem. To push banks to the hinterland, the RBI correctly specified that at least 25% of all branches of new banks must be in towns with populations of 10,000; the finance ministry should not dilute this by raising the population bar to 50,000. If it is serious about inclusive banking, the rules for all banks and not just new ones, should say that a quarter of all branches must be in towns where at least 10,000 people live. ( SOURCE THE ECONOMIC TIMES)