Banking Licensing in India – Past and Future

As the reach of banking is an issue in India, from financial inclusion perspective, considering access to bank credit and services through expansion of banks in unbanked and under-banked regions is of utmost importance. The specific risks on account of the business model may have to be addressed by calibrating the prudential regulations together with developing the resolution regime and process reorientation for shortening the time period for settlement of deposit insurance claim. In the deregulated interest rate regime, the small banks will have freedom to decide their lending rates based on the cost of funds. Similarly, the improvement in communication facilities would enable them to reap the efficiency gains driven by technology similar to the medium and large banks. The approval of licences for IDFC Ltd and Bandhan Financial Services marks the start of a cautious experiment for a sector dominated by lethargic state lenders, many of which are reluctant to expand into rural areas or towns where banking penetration is low.