As the rupee continues to hit new lows, economists and corporate honchos continue to predict deteriorating economic performance and politicians continue to fight over reforms like there is no tomorrow, the Reserve Bank of India (RBI) has recommended revamping the banking structure to further strengthen the backbone of our economy.

The apex bank has reiterated the need to seriously and urgently work towards achieving its financial inclusion goals and has recommended setting up of banks as a continuous process in its discussion paper titled ‘Banking Structure in India – The Way Forward’, released on Tuesday and for which recommendations have been invited from the public till September 30.

Proposing a fresh look on the way banking is done in India, the paper comes almost two months after 26 corporate entities, both public and private, submitted applications seeking banking licences. The apex bank is currently in the process of vetting the applications and is likely to issue licences early next year.

The idea behind bringing new entrants into the banking fold is to make banking services accessible to all – what is popularly known as financial inclusion.
Financial inclusion is the new buzzword, and operating only in urban regions is no longer fashionable. Banks have increasingly been looking to reach out to the rural pockets (as the figures released by banks reveal) and have been working out innovative ways to develop viable business models in areas that have been considered unbankable for long.

However, progress has been a tad slow given the economic downturn, poor financials of banks and the confusion regarding use of the business correspondent (BC) model. A cross-country survey of financial access undertaken by the World Bank in 2011 reveals that for every 1 lakh adults we have 10.64 commercial bank branches. In contrast, China (Macau) has 37.24 branches, Russia has 37.09, the US 37.03, China (Hong Kong) has 23.81 branches, and South Africa has 10.71.

The paper points that “even with 157 domestic banks (including 26 state-run banks, 20 private sector banks, 43 foreign banks, 4 local area banks (LABs) and 64 regional rural banks (RRBs) only about 40 percent of the adults have formal bank accounts”.

In this regard, one of the most important recommendations of the discussion paper has been to ensure "continuous authorisation" of banking licences in a bid to enhance competition and reach of the banks. It has been argued in the paper that the ‘Stop and Go’ licencing policy needs to be reconsidered while ensuring that strict entry norms are maintained to keep the non-serious players at bay.

This is an interesting proposition considering that the Indian banking sector has been very restrictive and is dominated by good old public sector banks. It was a decade ago when the last banking licences were issued to two entities. Making granting of licences a frequent practice while ensuring that checks and balances are in place can be a game-changer for the country. This would not only make banking accessible to all but also raise the quality of these services.

Another important recommendation in the paper is the restructuring of the banking sector into four levels. While the Indian banking system is touted to be one of the most sound systems in the world, our banks have not reached the level where they can compete with the global players in terms of size of business and profits made. It is for this reason that the paper points towards creating a four-tier sector with every level catering to specific needs.

• The first level would comprise three or four big banks dominating the domestic industry and also with a global footprint. This is crucial to be able to take the Indian banking sector to the global platform.
• The next level would comprise mid-size banks, including those catering to niche segments (housing finance, infrastructure lending institutions etc).
• This would be followed by the old private sector banks, regional rural banks and urban cooperative banks at the third level.
• The last level will comprise small privately owned local banks that will further the financial inclusion agenda.

The advantage of putting in place such a framework would not only ensure the achievement of varied objectives of the sector but will also make regulation easier and effective. This is critical, especially because the sector is looking at the arrival of more players.

Further, the paper also points at the possibility of the government diluting its stake in the PSBs. Now, that is a suggestion likely to be the debated.
Currently, there are 26 PSBs operating in the country. While public welfare is their top- priority, these banks have often been faced with criticism for operating with lower/negative profits and swollen non-performing asset (NPA) figures. They often face the damned-if-you-do-and-doomed-if-you-don't dilemma. It is for these reasons that it has been recommended to do away with some of the government control. Private investment will undoubtedly bring in greater efficiency but the question is, will the motive of public welfare not take a backseat?

The discussion paper enlists a few other recommendations and the major idea that almost leaps at you is the boosting of competition in the sector to make the leap. These recommendations will have to go through several rounds of deliberations after which guidelines will be finalised. However, the one issue that needs to be seriously considered during these deliberations is whether India, with its present level of financial reach and literacy, is ready for too many players driven by the profit-maximisation motive.