Banking in India remains a service in acute short supply both in terms of the people it reaches and the amount of credit that passes through the system. Close to half the country’s population have no access to a bank. Indian households park less than half their savings in the financial system.
And banks lend just over a half of the national income. India is thus doing a lot of its business without banks. This reflects in the stature of our banks on the world stage: not one, including the state-owned behemoth State Bank of India, figures in international banking’s top league. The UPA’s inclusive growth agenda has financial inclusion at its core. This requires a vibrant banking industry that can reach out to the country’s unbanked millions.
The Banking Regulation (Amendment) Bill, which was passed by the Lok Sabha on Tuesday, is a necessary first step to put the industry on a higher growth path. It empowers the banking regulator, the Reserve Bank of India, to look deeper into applications for new banks, intervene in the management of badly run ones and keep tabs on significant stake sales. The RBI had made new bank licences conditional on being given a bigger regulatory stick. The government has alongside managed to open the door for private capital in Indian banking by raising the ceiling on investors’ voting rights. The Centre has been seeding much of the banking sector’s growth through taxpayer money, but a generation of private banks has established deep roots in the system through technological advances, modern management and a vastly improved customer experience. With an oversight mechanism in place, the industry can now draw in fresh capital.
Bank intermediation between lenders and borrowers in India will be driven by fast-growing private banks on the one hand and on the other by state-owned banks fanning out further across the countryside. Policymakers hope this coexistence will be symbiotic with the former passing innovation on to the latter while gaining from the new markets they open up. The government has a lot to benefit from universal banking. It is the largest borrower in the country and can reasonably be expected to lay claim on more savings that find their way into the banking system. On the other hand, the UPA has begun to experiment with direct cash transfers to funnel welfare spending. This, too, requires ubiquitous banking. India has had a well-defined link between the pace of its economic growth and the spread of its bank branches. This has mainly been achieved by fiat with state-owned banks. The stage is now set for private, including foreign, capital to shoulder some of the load.