RBI’s report on inclusive banking is visionary and idealistic, which has to be suitably calibrated with the existing system and structures in order to work. The creation of new kind of banks, review of priority sector lending and a revolutionary thought of dispensing with SLR are some issues that provoke discussion.
First, the definition of inclusive banking is laudable as the aspiration is to ensure that every adult has an account by January 2016 with Aadhaar being the facilitator. This goes along with access to credit, and certain norms have been laid down for credit as well as deposits and investment to GDP for every district. In fact, a distance factor has been brought in so that no one has to walk for more than 15 minutes to reach a point of contact. While this is a perfect picture of a perfect banking system, the question is one of incredible cost and financial illiteracy. Shouldn’t the existing system be incentivised to do it rather than create new structures?
Second, the report talks of creating payment banks which take small deposits and invest in short-term SLR securities with zero risk like a narrow bank. Given that operational costs are high and return on short-term paper lower than the cost of deposit (there will be products offered with CPI indexation), will such banks be viable?
Third, there is a case for having new wholesale banks, which could be subsidiaries of existing outfits. These banks would deal only with wholesale deposits and could be wholesale investment banks or wholesale consumer banks based on the number of branches they have. By keeping a minimum threshold of R5 crore for a deposit, these banks could mimic what were the DFIs earlier, which were transformed to universal banks due to an unviable model. One is not sure if this model would work as banks gain from CASA deposits, which will not be available.
On priority sector lending there are some fairly aggressive suggestions. The first pertains to increasing the limit from 40% to 50%. This goes against the grain of an open financial system and antithetical to the ‘One Hundred Small Steps’ report discussed some years ago and Narasimham before that. While banks would rarely openly oppose such lending, pre-empting 50% of the 73% of funds (rest 27% set aside for CRR and SLR requirements) available for a sector, which runs a higher risk of becoming an NPA, may not