Saturday, February 27, 2010

Why more banks are not welcome

In the previous post it was stated that allowing more players in the banking field is an avoidable risk. Let us see the reason given by Pranabda for laying a green carpet for more banks. The budget speech said " The Indian banking system has emerged unscathed from the crisis. We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services. In this context, I am happy to inform that the RBI is considering giving some additional banking licenses to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI's eligibility criteria."

Herein lie the seeds of a possible financial crisis. Is the honourable minister feeling sorry that our banking system has emerged unscathed from the crisis ? The minister's stated objectives, namely system's growth in size and sophistication and larger geographic coverage of banking industry ensuring more inclusiveness, are unexceptionable. His solution however contradicts these goals

There are enough players in the banking system who can ensure the system's growth. You cannot expect better sophistication (in terms of technology) from NBFC than from presently established banks. Technology is no more any bank's exclusive competitive advantage. It is illusory to suppose that private sector players will extend the geographic reach. It is easier to enable the public sector banks to open branches in unbanked areas by providing suitable incentives. Access to banking services especially in urban areas is already comprehensive. In essence, there is no need for additional players in urban areas. New players will not be interested in rural areas. QED.

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