Do we need more banks?
- An Insight by Mr. Utkarsh Goel, Faculty, IIIT - Allahabad
It has been the talk of the town in the financial world but with RBI releasing working paper on it the debate has heated up. We are talking about new licenses to private players to setup banks. In budget speech of 2010-11 the Union Finance Minister, Mr. Pranab Mukherjee, gave an indication that RBI and Government of India is thinking of issuing additional banking license to private sectors. The industry cheered it and some even dubbed is as first major financial reform in two decades. RBI soon came out and clarified that it was just that it will consider new licenses and there will be fresh guidelines. RBI has been cautious in giving license to private sector, with last license given back in 2004 to Yes bank.
Now that RBI has released working paper the question arises do we need more banks? There could be hundred financial and economic implications to it (both positive and negative) but let us ask two most important stakeholders the common man and the banker himself.
Ask a common man and he would say both yes and no. Yes, because more banks will lead to more competition and will result in more benefits for the common man. And No because it multiplies his confusion of selecting a bank and financial service, it will result in more bugging calls from private banks for selling their cheap credit cards. I may again go back to the era where I used to receive a call daily from one of India’s top private banks who wanted me to have a credit card even though I would not be able to use it anywhere in my small town.
If you ask a banker whether we need more banks, the answer is uniform, No. They are already bogged down by pressure of sales. The banks have been literally reverse auctioning loans. This has given rise to many disturbing (I wont say illegal) practices in banks. Customers like big corporates which have the power to bargain from banks are just bleeding the profitability of the banks and the banks are in turn bleeding the common man. To name a few practices, banks have been giving loans to corporates at rates below the rate at which they are accepting deposits from them. This you would say is against the basic principle of banking. Yes, but profitability is covered from players who have emergencies or who really need money.
As one banker explained, ifyou see the market structure, there are just 2-3 PSU players in a particular sector/field (like SAIL for steel, GAIL for natural gas etc.). This has been the main reason for their increasing profitability and superior status. Banking sector on the other hand has 27 public sector banks. All of them are present every where in India and fighting amongst each other to gain profits. And even after this the RBI paper says that one of the major reason for giving more licenses is “a larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of service”. Do we really need more?
