The new bank licences are expected to go to large entities as the RBI discussion paper released on Wednesday has been largely critical of the small banks that are limited in size and scope. The paper makes it abundantly clear that the central bank is not in favour of starting new small banks having lower entry-level capital.
The RBI’s stance is at odds with the views expressed by some experts and commentators. Raghuram G Rajan, honorary economic adviser to Prime Minister Manmohan Singh, has been favouring entry of small banks into India. A 2008 committee on financial sector reforms headed by Rajan has suggested the government to allow small banks. He reiterated this position in a recent interview to FE.
The RBI’s aversion towards small banks is based on its assessment and experience of the local area banks, urban co-operative banks and small deposit taking non-banking finance companies.
“The experience with small banks has not been encouraging. The Local Area Bank model has inherent weakness such as unviable and uncompetitive cost structures. These banks are required to confine their operations to a small area of three districts. Further, the size of operations and also the locational disadvantage of these banks act as a constraint to attracting and retaining professional staff as well as competent management,” the paper said.
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