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You can bank on them

india Updated: Jul 02, 2013 03:50 IST

India needs more banks. There’s no question about that. That’s the only way to generate financial inclusion in a country where banking penetration, defined as the percentage of population with a bank account, is to touch 60%.

Compare that with the near 100% penetration in the West and over 90% in Brazil, and you get the picture.

And financial inclusion, the stated goal of the government, will remain a pipedream unless the banking sector expands exponentially to include every adult in India.

The Rangarajan Committee defined financial inclusion as “the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost.”

So, the news that more than two dozen of India’s leading corporate houses, financial services companies, non-banking financial companies, public sector firms and India Post have applied for licences to set up new banks is a welcome one.

But here, we must temper our enthusiasm for financial inclusion with some caution. Ownership of banks by corporate houses should not become a licence for crony capitalism.

It is to preclude just this possibility that the US and South Korea bar industrial houses from owning banks. Japan discourages such cross-ownership.

In Britain, Germany, France, Brazil and South Africa, however, corporate houses are allowed to set up and run banks.

In India, the Reserve Bank of India has a long and distinguished history of robust, responsible and successful supervision of the banking sector.

It can, by law, supersede the board of any bank to ensure, among other things, the security of depositors’ funds. So, there is every reason to be confident that, by and large, India’s new banks, which will come into existence from 2014 onwards, will deliver on their mandate.

The new private sector banks that will come into existence from next year will surely improve financial inclusion. Competition changed the game in telecom and aviation.

There’s every reason to expect it to do the same in banking.