India has 155 commercial banks, including 151 scheduled commercial banks, and 115,014 banking offices. Not counting scores of cooperative banks and ATMs that dot the nooks and corners in the country. Yet Reserve Bank of India (RBI) is promoting new kind of differentiated banks like payment banks or small banks. But do we really need them?
Experts say there is huge room for several kinds of banks to thrive as India is woefully short on banking infrastructure.
According to Crisil's financial inclusion index, called Inclusix, which covers three parameters of branch, deposit and credit penetration, the index is placed, on a scale of 100, at 40.1.
This means only 40% of the country is properly covered under the banking net.
"Under-penetration is evident in terms of number of ATMs and point of sales too. Hence, there is a need for much greater banking and credit penetration, going forward. This is because despite efforts to develop the corporate bond market, the Indian financial system remains bank-dominated with commercial banks accounting for over 60% of the financial sector assets," said H R Khan, deputy governor of RBI, at a banking conference, recently.
With a stated key objective of achieving financial inclusion, promoting deposit habit with banks among the poor appears to be what RBI is focusing on.
"Both payments banks and small banks are niche or differentiated banks; with the common objective of furthering financial inclusion. While small banks will provide a whole suite of basic banking products, such as deposits and supply of credit, but in a limited area of operation, payments banks will provide a limited range of products, such as, acceptance of demand deposits and remittances of funds," RBI said while announcing the differentiated bank concept last week.
In a stroke, the central bank has created opportunities for banking correspondents, telcos, super-market chains, companies and also real sector cooperatives to enter the banking system.
These entities have a deep penetration across the length and breath of the country, which will help achieve the most important feature of financial inclusion: deposit mobilisation.
"The financially excluded segment's highest requirement is for savings services, which unfortunately regular commercial banks are unable to provide. That is the reason we periodically have the 'Sarada' type of crisis which wipes out hard earned savings of the poor," Samit Ghosh of Ujjivan Financial Services and president of Micro Finance Institutions Network, told dna.
But to achieve that the banking sector needs human intervention where people would have to reach out to the un-banked in rural as well as urban areas.
And that human resources is available with the microfinance outfits, the likes of Bandhan or Ujjivan, or with business correspondents.
"Business correspondents can definitely play a bigger role in the evolving banking environment. We have the people resource to make the poor and the illiterate open bank accounts and bring in Rs 50,000 crore into the banking channel every year," said Kumar Saha, managing director of Senrysa Technologies Pvt Ltd, a business correspondent with IDBI Bank, told dna.
But to achieve greater and meaningful involvement of business correspondents, the players should be allowed to undertake multiple financial products beyond just opening accounts or facilitating transactions, activities which alone cannot sustain the sector, said Saha.
The new kind of banks would also help companies like Sahaj e-Village Ltd, which has meticulously created infrastructure in rural areas operating over 26,000 Common Services Centres across six states.
"The new banks may completely revolutionise the financial outlook in rural India. With strict screening procedures, small banks project would let serious players like Sahaj, having one of the largest IT connected rural networks, carry forth its benefits across the country. Though there are restrictions like disallowing account holders to hold more that Rs 1 lakh in their accounts, it is envisaged that this introduction would be largely beneficial," said Sanjay Panigrahi, CEO of Sahaj, a Srei group outfit. It would however help if these small banks are allowed to execute government disbursements and are given options to invest collected deposits in infra projects, highest rated bonds, rural housing and power, he said.