A shortage mentality, probably a relic from our licence-permit raj days, continues to pervade both officialdom and business. A case in point is banking. India is an underbanked country, and we could certainly do with more banks. So when the Reserve Bank of India opened a window for new bank licences, we had 26 applicants. There could have been more, if the central bank had not put in all kinds of exclusionary clauses in its entry rulebook.
(This story appears in the 09 August, 2013 issue of Forbes India. To visit our Archives, click here.)
More is better is certainly a simplistic logic. IMO, at an existential level, bank is a consolidator of funds of a depositor, and manages their distribution with an idea of generating a profit, while maintaining liquidity. So would having more consolidators help the depositors or borrowers? Is there an optimal size for banks? Do we need many small banks competing for higher returns to depositors in good times, driving up risks and folding up in an economic cycle, as we saw in the US? India already has a large number of financial intermediaries not under RBI regulations (co-op banks, thrift funds and more traditional vehicles) with different risk profiles. Can RBI effectively regulate more banks, or will the distinction between banks and mutual funds be blurred?
on Sep 5, 2013