Foster financial inclusion by mobile banking and Aadhaar project

The Reserve Bank of India’s (RBI) draft guidelines for ‘on-tap’ licensing of banks privilege, in eligibility, competence and corporate governance. Clearing licences continuously will help extend the reach of formal finance in India, a grossly underbanked country.

The rules bar large corporate houses from controlling banks, but they can hold less than 10% stake in a bank. This makes sense. Banks, as fiduciary institutions, hold deposits of the public in trust. Any trouble in their financial health has consequences for the entire financial system and the economy.

So, the RBI’s move to make matters transparent and retain the right to decide who satisfies the important ‘fitand-proper’ criterion is the right approach.

Allowing professionals and individuals with a minimum experience of 10 years and giving large non-banking finance companies a chance to convert themselves into banks is welcome. The RBI has also eased its earlier guidelines that had mandated the holding company route to own a bank.

Individuals or a standalone promoting entity need not have a non-operative financial holding company (NOFHC). However, if other group businesses are proposed to be set up after incorporation, the bank will have to move towards an NOFHC structure. But promoters need not own more than 51% stake in the NOFHC.

Flexible norms for different lenders and ring-fencing the bank from any possible troubles of other businesses make eminent sense.

The condition that new banks must open at least 25% of their branches in rural areas is onerous. Instead, banks can be mandated to generate the same proportion of business from the hinterland. The best way to foster financial inclusion is to leverage on the use of technologies such as mobile banking and take advantage of the Aadhaar project.