Revamp Of Banking Structure On The Cards

Taking cues from the developed countries, the apex bank of India is all set to revamp the banking structure in India. Unlike in developed markets where separate banks exists, which offer niche services, in India we still have universal banking structure that caters to all type of needs be it retail, infrastructure funding or investment banking.

According to a discussion paper issued by RBI on August 27, 2013, ‘Banking Structure in India – The Way Forward’, it has proposed a 4 tier structure for the Indian banking system that will cater to specific needs as mentioned above.

The first tier may make up of three to four large banks that will have both domestic as well as sizeable international presence. The second tier banks will mainly consists of mid-sized banks that will have economy-wide presence and will cater niche banking services. Old private sector banks, regional rural banks and multi-state run co-operative banks will form the third tier. Fourth tier bank will consists of many small privately owned local banks and cooperative banks, which will cater to the credit requirements of small borrowers in the unorganised sector in unbanked and under-banked areas.According to the discussion paper, the reasons for exercising such review, is “to put forth various options to enable the banking system to cater to the needs of a growing and increasingly globalising economy, providing specialised services and deepening financial inclusion, the lessons learnt from the crisis are suitably taken into consideration, despite Indian banking system coming out relatively unscathed from the crisis”.

Other important topic of discussions include recapitalisation of the Public Sector Banks (PSBs) through various options, such as issue of non-voting equity shares or differential voting equity shares, adopting FHC (financial holding companies) structure or diluting stake. 
For the growth of the entire banking sector in India, PSBs have always played an important role as they control three fourth of the market share. The current strain in the fiscal position is making the government handicapped with regards to infusion of capital in these banks. 

The discussion paper has also proposed for ‘continuous authorisation’ rather than current ‘Stop and Go’ licensing policy. What this means is that earlier banking licences were issued in phased manner as we saw in 1993 when ICICI and HDFC Bank were issued licences than in 2003-04, Yes Bank and Kotak Mahindra Bank came into existence. One time grant of banking licences puts strain on the existing banks in terms of human resources and business. 

The RBI has invited comments on the discussion paper by 30th September.