Functions & Policies of RBI in Rural Banking
New Banking Licensing Policy & Dr.Raghuram Rajan’s Views
Though the Indian financial system has made impressive strides in resource mobilization, geographical and functional reach, financial viability, profitability and competitiveness, vast segments of the population, especially the underprivileged sections of the society, have still no access to formal banking services. The September 2008 report of The High Level Committee on Financial Sector Reforms, constituted by the Government of India in August 2007 under the chairmanship of Dr. Raghuram G. Rajan, has recommended allowing more entry to private well-governed deposit-taking small finance banks with stipulation of higher capital adequacy norms, a strict prohibition on related party transactions, and lower allowable concentration norms (loans as a share of capital that can be made to one party). Such measures would also increase financial inclusion by reaching out to poorer households and local small and medium enterprises.
In connection the above a discussion paper on Entry of New Banks in the Private Sector released by RBI in August 2010 suggests an option of allowing industrial and business houses to take over RRBs in addition to other options like permitting industrial and business houses to promote banks or allowing Industrial and business houses that have predominant presence and experience in the financial sector
Further RBI guidelines on entry of new banks in the private sector issued in 2001 stipulatedthe new bank will have to observe priority sector lending target of 40 percent of net bank credit as applicable to other domestic banks and a new bank was also required to open 25 percent of its branches in rural and semi-urban areas to avoid over concentration of their branches in metropolitan areas and citieson the same lines as new private sector banks established under guidelines laid down by RBI in January 1993. The discussion paper suggested one of the options to maintain the status quo of this stipulation and the other option suggested is business model oriented thrust on financial inclusion. The business model could berequired to clearly articulate the strategy and the targets for achievingsignificant outreach to clientele in Tier 3 to 6 centers (i.e. in populationsless than 50000) especially in the under banked regions of the countryeither through branches or branchless models.
The RBI is yet to come out with new guidelines on this.