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SURE FAILURE

The long process of issuing new bank licences may perhaps be approaching its end. Whom the licences will be issued to is also pretty well known. The new governor of the Reserve Bank of India has appointed a committee to recommend new licensees. It has before it a list of a couple of dozen applicants who have managed to jump through all the hoops held up by the RBI. Most of the applicants have the support of one or other prominent business house; so they cannot be ignored on grounds of obscurity. The committee is headed by a former governor of the RBI known for his socialist and conservative leanings. So it is likely to choose the most boring names out of the list that confronts it. If everyone that has hitherto been shortlisted is given a licence, the number of banks could almost double; the actual increase is likely to be smaller. Licences are only the first step; the new banks will then have to find properties that can attract customers, staff that can be trusted with money, and depositors who are prepared to move from the banks they are familiar with. All this is going to take time; so it is unlikely that the banking structure of India will change much in the next decade. Whatever competition emerges will be muted.

This is a pity, because the RBI also has ambitious requirements of the new banks, that they will open a quarter of their branches in villages where there is little business, and lend to the poor who are known all over the world for not being able to repay loans. This is implicit in the decisions already taken; although the new governor is distinguished by his rationality and sense of fairness, he will be able to do nothing to ameliorate the bias against the new banks. The bias is important in two respects. The existing banks have got all the bigger and sounder clients; the new banks will have to find borrowers amongst those with no or unknown borrowing records. And the existing banks have strategically positioned branches in cities; the new ones will have to site themselves in less promising locations. The RBI has long nudged the old banks to go in both these directions; it imposed quotas of rural branches and unattractive borrowers on them. It was singularly unsuccessful. They blithely ignored its instructions; after all, they were government banks, and knew that the RBI could never punish them.

There is, however, one class of clients that they ignored and that holds promise, namely village moneylenders. No one went near them because official machinery had branded them untouchables. But they do considerable lending business at attractive interest rates. The new banks should lend to them essentially, use them as rural branch managers, except that they would be independent entrepreneurs, and not employees.