The appointment of the new governor of the Reserve Bank of India was not just due to his eminence as a financial economist; he was tried out by the government, and his performance presumably fitted what it looked for. He was chief economic advisor to the ministry of finance just before he stepped into the governorship, and no doubt in that role came close to the minister of finance and the prime minister. But before he became a trusted bureaucrat, Raghuram Rajan had also chaired a committee in 2009 on financial sector reforms. Amongst the broad range of topics it covered, it also dealt with the issue of bank licences. Of the points it made, two were important. One was that the RBI should give licences to a large number of small private deposit-taking banks. The other followed a recommendation of the task force on revival of cooperative credit institutions, that cooperative credit societies should be divided into strong and well-run institutions and the rest, and that the first should be converted into banks.
The Rajan committee supported this recommendation: it would lead to the conversion of cooperative societies set up to give agricultural credit into full-scale banks giving a range of services to the rural population. Thus, the Raghuram Rajan of old times favoured the licensing of a large number of banks in towns and co-operatives in villages, and the introduction of vigorous competition in the banking industry. This was very different from the approach of the pre-Rajan RBI. It did its best to delay the giving of new banking licences. When it could delay no longer, it set such stiff and unattractive conditions that it received only about 30 applications, mostly from big business houses. Thus, there were two diametrically opposite approaches to bank licensing. The official approach favoured minimum new competition to the existing public sector banks; the Rajan committee approach favoured considerably more competition from new banks in towns and cooperative credit societies converted into banks in villages.
Now, however, the same Mr Rajan in his new role as governor has appointed a committee under the ex-governor, Bimal Jalan, on new bank licences. Mr Jalan made a reputation as a cautious and conservative governor. And the committee he heads has been asked to consider only the received applications for licences. So, whatever it recommends, it will result in a very small number of licences, mostly to the big boys from industry and finance. No doubt the RBI will impose upon them conditions that would require them to open a certain number of branches in villages; but they are unlikely to revolutionize the moribund Indian banking industry. This is very different from what the earlier Mr Rajan envisaged. Power brings responsibility and makes people conservative; but did Mr Rajan have to do such an about-turn?