‘Small finance banks needed for financial inclusion’

A financial expert says that smaller entities with emphasis on good corporate governance, high-quality lending and low-cost structures can help to provide banking to low-income groups

Small finance banks need to be set up in order to achieve the government’s objective of making available banking services to low-income groups at an affordable cost, a leading financial sector expert has said, reports PTI.

“We need to fall back on the commercial banking model for seeking a satisfactory solution to the problem of increasing financial inclusiveness. Setting up of small finance banks that will have linkages both with big banks as also with small entities will help in widening access to retail clients,” said RH Patil, chairman, Clearing Corporation of India.

So far, the concept of small banks has not found favour due to the unsatisfactory track record of many existing small banks which have poor governance structures, excessive government and political interference, and unwillingness of the regulator to undertake prompt corrective actions, he said.

“But compared with other options like co-operative banks or the Regional Rural Banks, the proposed small finance bank model will prove to be a far better choice,” he said.

There should be strong emphasis on good corporate governance, high-quality lending and low-cost structures for these banks, Mr Patil said.
“Given the nature of their asset portfolio, it is necessary to stipulate a strong capital adequacy ratio. To begin with, each bank should have a capital of at least Rs200 crore so that only relatively strong candidates jump into the fray,” he said.

Mr Patil said that small finance banks should essentially be like regional area banks, with their area of operation well defined at the time of granting them a banking licence.

Up to four-five candidates may be considered for grant of small banking licences in any region. “Licences could be given to NBFCs which already have a good governance track record in areas such as housing finance, retail business and leasing, and industry or corporate houses with a good governance track record,” Mr Patil said.

With regard to NBFC applicants, the Reserve Bank of India needs to be particularly careful in its scrutiny as the experience so far has not been “uniformly satisfactory”, he said.

While these banks would be pursuing mainly the inclusiveness agenda, they need not be precluded from having a small part of the business in favour of large clients so that it is possible for them to have cross-subsidisation in favour of smaller clients, he said.

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    kishore ghiya

    1 decade ago

    Mr. R.H.Patil seems to be ignorant of power of cooperative banks. After madhavpura scam which actually was scam of ketan parekh whom mr R.H.Patil at NSE and bank of india at RBI allowed any coperative sector was used by scamsters. There is no fault in cooperative banking sector. It is unwillingness on part of RBI to issue fresh licences. They amy allow new self group with raised entry point norms upto rs 10 cr. They may allow them to function with more regulations, but closing the doors for new licences has resulted in denying financial inclusions to small traders.
    Even in USA today savings and loan associations are allowed to open and wworld over co operative banking is flourishin and adding to gdp in thier countries. In India it RBI and only RBI responsible for the mess. RBI ahmedabad office was in full knowledge of madhavpura scam Hundreds of complaints were there. The UBD regional manager was found hobnobing with madhavpura scamsters but nothins has happened to him. As a person connected with cooperative banking in gujarat i request mr R.H.Patil why world over co oprative banking is still flourishing and allowed to grow and why stopping of new licences. Mr. Patil is also aware that new small and medium stock exchanges are not allowed to come thanks to such people who are policy makers and regulators in new delhi. Reliance power IPO of 2008 has done more harm to equity cult then hundreds of small companies. The greed or merchant bankers and indian promotors have killed the equity cult. I hope mr patil will say about low participation by indian household in equity investment.
    Kishore Ghiya Rajkot mob 09825217857

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