RBI Plans Rural Rider For Banking Entrants (03-Mar-2010)
In consultation with the government, the India''s Central Bank (RBI) is eyeing to restrict new entrants to rural and semi-urban areas in the initial years of operations.
A Finance Ministry official said that the new players may be given nod in order to open branches in the rural areas for the first 2 years and the subsequent extension of business in rural market will depend on the basis of their direct lending to agriculture sector, opening of no-frills accounts and other financial inclusion criteria.
In order to increase the geographic coverage of banks and improve access to banking service, the government has announced to give new banking licences in the recent budget.
A senior RBI official said that the proposed move in the budget about opening up of the banking space is to achieve the larger aim of financial addition. If new banks also start competing in the urban and semi-urban market, the whole concept will falter.
Both the government and the RBI will work together to provide appropriate banking facilities to habitations having population of more than 2000 by March 2012.
According to the RBI data - 27 public sector banks have opened 13,381 branches in rural areas, 22 private sector banks, both old and new, are far behind with 1,113 branches.
The new guidelines may be a set back for companies like - Reliance Capital, Mahindra, Cholamandalam and Tata Finance who were hoping for an early banking license.
According to the official, RBI may also come up with strict guidelines on capital provisioning for new entrants. The new guidelines will ensure that the financial stability of the banking space is maintained
Earlier, RBI had to arbitrate in cases of bank failures such as Global Trust Bank, which was finally merged with Oriental Bank of Commerce.
Private Banks are also far behind in lending to the priority sector.
The government has already created a Rural Infrastructure Development Fund (RIDF), where shortfall from priority sector lending is diverted to take up rural infrastructure projects.
On the other hand, the RBI is reconsidering over relaxing the norms for derivatives on the back of global financial crisis.
The central bank has pointed that it may slip-up on the side of caution when it comes to filling gaps in Indian markets and financial sector innovations.
RBI has mainly highlighted the risks in credit derivative and short-selling of government debt. It has also stated its decision to increase the transparency in secondary market trading of short-term corporate debt.
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