The Reserve Bank of India wears two hats. It is the regulator of all banks; it is also the chief manager of government banks. If they continue to dominate the banking system without being the most efficient or customer-friendly, the credit must go, at least partly, to the RBI. When it sees an opportunity to send some profits the way of government banks, it is happy to oblige them. The latest instance of helpful market manipulation comes from the foreign exchange market. Government oil companies bring enormous business to the banks. They spend more than four lakh crore rupees a year on oil imports. They buy the foreign exchange from banks, and pay them somewhere between Rs 5,000 and Rs 10,000 crore a year in commission. But there is no favouritism in the distribution of these riches; oil companies ask banks to bid, and buy exchange from the bank which charges the least. Now, the RBI will allow them to be so open with only half their exchange purchases; orders for the other half must be placed through a single bank yes, no prizes for guessing owned by the government. The excuse given by the RBI is that when banks go into the market to buy exchange for oil companies, so many banks entering the market together give the impression that the demand for exchange is much higher than it is. After they have made their purchases, they go home, giving the impression that the demand for exchange has collapsed. Their behaviour destabilizes the foreign exchange market; the RBI is only trying to restabilize it.
So in the RBIs view, there is too much competition amongst banks when they go to the foreign exchange market. But it also must think that there is too little competition amongst them in opening automated teller machines; for it has invited everyone who has Rs 100 crore on his balance sheet to go to the nearest RBI office with Rs 10,000, and ask to be allowed to set up ATMs. He will have to promise to set them up in places with population under 50,000. His ATMs would have to issue money against credit or debit cards of banks licensed by the RBI. He will not be allowed to issue cards; so in effect, he will be an agent of a government bank.
The RBI has for long been trying to get its banks to open ATMs in small towns and villages as a cheap, if limited, extension of services. But banks have opened fewer than 100,000, of which half are in their own branches. They are just not competing enough to open ATMs. The RBI needs to make up its mind on whether there is too much or too little competition amongst banks. It is so lost in the cobwebs of micro-regulation that it no longer knows which is the case.