We need new banking systems that work for the poor
The last time that licences were given out for setting up private banks in India was way back in 2004. The Reserve Bank of India, vide its guidelines on February 22, 2013, has once again got the ball rolling on the issue of allowing entry of private banks into the Rs.73 trillion banking sector. It is hoped that more banks in the country would lead to the government achieving its target of providing access to financial services for the entire bankable population. With 720 million potential users still remaining outside the banking framework, there is a huge gap that the banking industry could help to bridge.
But deepening of financial inclusion requires providing access to services and credit to a large number of highly dispersed and often remotely located individuals and agents. This raises transaction costs significantly, which if passed on to clients in the form of higher interest rates would price banks operating in rural areas out of the market. The billion rupee question is: Will the new bank entrants be willing to run the gauntlet and serve the objectives of financial inclusion even at the cost of taking a hit to their bottom line?
As private banks cannot justify on commercial grounds the business model that allows them to deal with the triple whammy of low savings balances, small transaction sizes and a large number of customers, they will typically pull back their physical presence in rural areas to discourage the custom of poor. But to ensure that the objective of financial inclusion is met, it is essential that poor people are ensured of low-cost ways of transacting. The ability to undertake remote transactions is therefore a key element of financial accessibility.
To achieve universal banking access, new banking systems are needed that work for the poor and yet are commercially sustainable. Will the new licensees be able to meet these requirements?
The last time that licences were given out for setting up private banks in India was way back in 2004. The Reserve Bank of India, vide its guidelines on February 22, 2013, has once again got the ball rolling on the issue of allowing entry of private banks into the Rs.73 trillion banking sector. It is hoped that more banks in the country would lead to the government achieving its target of providing access to financial services for the entire bankable population. With 720 million potential users still remaining outside the banking framework, there is a huge gap that the banking industry could help to bridge.
But deepening of financial inclusion requires providing access to services and credit to a large number of highly dispersed and often remotely located individuals and agents. This raises transaction costs significantly, which if passed on to clients in the form of higher interest rates would price banks operating in rural areas out of the market. The billion rupee question is: Will the new bank entrants be willing to run the gauntlet and serve the objectives of financial inclusion even at the cost of taking a hit to their bottom line?
As private banks cannot justify on commercial grounds the business model that allows them to deal with the triple whammy of low savings balances, small transaction sizes and a large number of customers, they will typically pull back their physical presence in rural areas to discourage the custom of poor. But to ensure that the objective of financial inclusion is met, it is essential that poor people are ensured of low-cost ways of transacting. The ability to undertake remote transactions is therefore a key element of financial accessibility.
To achieve universal banking access, new banking systems are needed that work for the poor and yet are commercially sustainable. Will the new licensees be able to meet these requirements?
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