The Reserve Bank of India (RBI) has once again invited applications for licensing new private banks. Instead, the RBI must first consider privatising some existing Regional Rural Banks (RRBs) by allowing the licensees the option to take them over. Reputed business houses should also be considered for this effort.
It should be ensured that the new private banks continue to operate existing branches, while freely opening new ones in unbanked rural areas. They should also be allowed to expand their branches in urban/metropolitan areas in accordance with the RBI stipulations.
RRBs were always a noble concept when they were first set up in 1976. Within the first five years, 196 'gramin banks' were established, mostly as subsidiaries of public sector banks. Today these public sector banks, which control almost 80% of banking in the country, work for profit. This is pitiful because serving the unbanked and the underprivileged - their raison d'etre - is no longer part of their mission.
As a result, public sector banks have shrunk the rural branch network (from the peak of 58.2% in 1993 to about 28% now) and the masses remain deprived of banking and credit facilities. While there are just 60 RRBs surviving today, the Central government, state governments and particularly the RBI has been meting out step-motherly treatment to these banks since their inception.
At a time when the RBI is struggling to maintain RRBs in the black, privatising 'stressed' RRBs seems to be an effective strategy. This will not only serve the stated objectives of the ever elusive financial inclusion, but also infuse more capital into the banking system. New private banks may also be asked to pay a premium beyond market value for taking over existing banks.
In 2010, the government decided to have some more private banks of global standards. The sad truth is that despite being convinced that the 'too-big-to-fail' model is outdated, the RBI keeps following this strategy as the government has a policy of having big banks. Fortunately, only two licences were issued then.
Meaningful financial inclusion is possible only through the formal banking system, not through the new generation agents who, disguised as banking correspondents, have replaced traditional bank branches. These agents are no different from traditional moneylenders - both charge usurious interest rates. Financial inclusion remains a dream. This must change. Only the RBI can do it.
(KL Khetarpaul is former executive director, Reserve Bank of India. The views expressed by the author are personal)