The Hindu Business Line : ‘Liberalise entry norms, create small finance banks’

Chennai, April 7 The Raghuram Rajan Panel on financial sector reforms has recommended liberalising entry norms for banks. It says that the minimum norm of Rs 300 crore of capital would mean that only large players could enter. Only foreign institutions or converted domestic financial institutions would be able to enter.

In comments that may come as music to the ears of many small private banks in the country, the committee urges the RBI not to focus overly on the level of capital. It notes that large quantities of capital can be quickly dissipated. The quality of promoters, their management capabilities, their capital adequacy and systems must be considered. It notes that despite the checkered record of some small banks, which it attributes to poor governance structures, excessive government and political interference and regulatory unwillingness or inability to take prompt action, there is no link between size and probity.

Local area bank

In this context, the panel recommends the creation of small finance banks that resemble the earlier Local Area Bank (LAB) scheme. It feels that the LAB scheme was never given a serious try and that it was prematurely discontinued. Having more small finance banks would increase financial inclusion by reaching out to poorer households and local small and medium enterprises.

The report notes that there are a number of micro-finance institutions (MFIs) that are small and have a good track record but are constrained by their inability to offer the full range of financial products (especially deposits which allow them to lower their cost of funds and commensurately their lending rates).

It points out that as of March 2007, the total equity base of all the 54 Indian MFIs put together was a shade below the Rs 300 crore capital requirement. It feels that some of these MFIs would benefit from transforming into small finance banks.

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