Differentiated Banks and Financial Inclusion

Abstract

For economic growth of a nation to be sustainable all sections of the society are included and participate in the growth process. Financial inclusion bringing more people into the formal financial system by giving individuals tools to cope with everyday needs and increases the likelihood of their access to education, health services and employment.

The two decades of post reform period in India witnessed transformation of the economy in to a higher growth plane. Over the years, the reach of banking has widened significantly to include relatively under-banked regions, particularly in rural areas. Commercial bank credit as percent of GDP picked up steadily from 5.8 percent in 1951 to 56.5 percent by 2012. The population per bank branch came down from 64,000 in 1969 to 12,300 in 2012 (RBI, 2013).

Resilience of the Indian banking system has improved over the years and it was able to withstand adverse economic and financial conditions from time to time. At the same time Indian banking sector is yet to meet the desired banking penetration and inclusion as witnessed in most advanced and some of the emerging economies. Hence there is a need for the reorientation of the present structure of the banks to further increase its capacity to serve the economy better.

The RBI-constituted Nachiket Mor Committee for financial inclusion first mooted the idea of having differentiated banks in the country. The panel's suggestions include specialized payment banks, retail banks, wholesale banks, infrastructure banks etc.

There has been a long standing debate on whether large banks with their financial strength and resources and ability for greater reach are better vehicles for financial inclusion than the small banks with limitations in these aspects but having 'local feel' and cultural synergy with the local population.

Currently, the wholesale banking space in India is occupied mostly by foreign banks and the new generation private sector banks. According to Mckinsey (2011), wholesale banking revenues, which in India account for close to 30 percent of total banking revenues, are expected to more than double, from roughly $16 billion in fiscal 2010 to $35 to $40 billion by 2015. It is widely recognized that banks providing services to retail customers have different skill sets and risk profiles as compared to banks which deal with some specific clientele like large corporate clients, infrastructure firms, etc. For a wholesale bank dealing with corporate clients only, it becomes a costly adjunct to maintain a limited retail banking presence. Moreover it becomes difficult for such a bank to meet the obligations for doing inclusive banking.

Banking on the poor is a viable option in India as there are huge mass at the bottom of the pyramid. There are enormous unmet potential lying in the rural areas for financial institutions. If financial institutions could successfully tap this potential there would be a win-win situation for institutions and people. This paper will discuss the different types of Banking Models and Structures that has been used in various countries and based on them can we make a Indianized model.

Full paper is available for download at
https://www.researchgate.net/publication/268092411_Differentiated_Banks_and_Financial_Inclusion

Keywords: Differeentialted Banking, Inclusion, India, Development