Differentiated licensing in banking in India: a critical analysis

Abstract

In this report, we have critically analysed differentiated banks as a measure to improve the status of financial inclusion in India. We began with a review of the current status of banking industry in India and conclude that there is a need for proactive measures to improve the reach of financial systems in India. We then looked at the measures already taken in India and all over the world to improve the financial systems. From these, we arrived at certain expectations from differentiated banks, depending on the necessities of the banking system in India and the success factors of initiatives in other countries. We then scrutinise the regulations and guidelines out in by RBI for Small and Payments Banks. Based on our interviews with several stakeholders in the Banking Industry, including some of the applicants, we have tried to arrive at ideal business models for Small and Payments Banks. We have concluded that technology, reach, collaboration with other banks shall be some of the key success factors for these banks. We have also asserted that applicants which already have an established user-base shall have an upper hand in the race for licenses. Finally, we have tried to analyse the effect these banks might have on the banking industry. We have established that these banks shall be looking to collaborate with the existing fullscale banks. Also, we have identified the Department of Posts as a dominant candidate for a Payments license. Finally, we have presented our views on the effectiveness of this move from RBI in terms of financial inclusion. We believe that although this is a move in the right direction, it needs to be supported with certain other proactive measures in order to achieve 100% financial inclusion. We have also discussed some of these measures.