Financial inclusion mandatory for new banks, says RBI

Indian Industrial houses and companies seeking banking licences will have their work cut out, as the Reserve Bank of India (RBI) has mandated new banks to open a fourth of their branches in unbanked rural centres.

While a recent circular issued by the central bank directed existing banks to open 25 per cent of their new branches in rural areas, industry analysts said the task would be more challenging for the new entrants and the time taken for them to turn profitable may be extended.
“Generating business from branches in unbanked areas may be a challenge for new banks. They would have to work out cost-effective ways to open branches in rural areas,” said a senior official of a large Mumbai-based public sector bank.

The new banks may opt to offer basic banking services in rural areas, at least in the initial period, to keep their costs low, even as they have to provide full-banking services in metros and urban centres because of competition, he said.

In its draft guidelines on new bank licensing, RBI said business models for new banks must include their financial inclusion plans. The models should be “realistic and viable” and any deviation from the stated plan after securing the licence would attract penalties like restriction in the banks’ expansion programmes or a change in management.

According to the draft norms, new banks would have to open 25 per cent of their branches in unbanked areas with a population of up to 9,999, according to the 2001 census. This would avoid over-concentration of their branches in cities, which already have adequate banking presence.

“The proposal to set up 25 per cent of branches in rural centres appears challenging. But if we look at other emerging markets and African countries, this model has been implemented through product innovation and the use of technology. So, even if it looks difficult, it is not impossible. If it is done properly, it would supplement the balance sheet strength of new banks,” said Viren H Mehta, director, Ernst & Young.

The new banks have to invest in ensuring connectivity between the urban and rural branches, since they have to operate on the core banking solution (CBS) platform from the beginning. Bankers said existing lenders currently use CBS or VSAT in areas where there are connectivity concerns. RBI also said the new banks should comply with priority sector lending targets and sub-targets that are applicable to existing domestic banks.

Source: BS

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