Will new bank will serve any purpose

RBI¶s Discussion Paper on new private banks needs to be commended for being wholesome. It takes one through the history of new private banks that came into existence after 1992 and highlights that only few have survived and grown. The report has opened the debate by clearly spelling out the pros and cons of the entry norms for enabling the reader to take an informed view. However, the broader question is, what are we trying to achieve by having more private banks? Theoretically, more players enhance competition which delivers superior results. So, let us look at what could be the other motivations behind this move. The first argument is that we need to have more branches. But, India already has a network of 82,511 branches as of December 2009, which is one of the largest in the world. Besides if branches were the main issue, the existing banks would have opened more in case it made economic sense. In fact, today, 63% of bank branches are in the rural and semi-urban areas with 39% being in rural areas. Therefore, more branches in rural areas cannot be the overriding objective. Will we end up having more branches in the high business centres? The second is that banking should be more inclusive and, therefore, more banks make sense. There are two aspects here. The first is that today 23% of deposits and 18% of credit are attributable to the rural and semi-urban areas, with rural regions having a share of around 9% and 8%, respectively. Clearly, they are under-banked and given the high share of branches, the business emanating is disproportionate. Will more banks channel efforts on deposits and credit to these regions? Today, the MFIs are trying to enable credit at levels that banks cannot reach. These are not just the unbanked people but also probably the un-bankable ones. New private banks starting off, would not find this ground too fertile to tread. The second aspect of inclusiveness is the reach to small borrowers. RBI¶s data on this is quite revealing. Of the 1,069 lakh accounts that are on the books of banks, 36%²less than Rs 25,000 ²have a share of 1.9% of total credit, while another 53% (loans between Rs 25,000 and Rs 2,00,000) have a share of 11.8%. Curiously, 0.2% of the total loan accounts are over Rs 1 crore, account for 58% of total outstanding credit. These numbers illustrate that bank...

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