banking system: how to slice up and slice up banking licenses to create a safer banking system


If data is the new oil, digital platforms must be new oil platforms. So the news that NITI Aayog is pushing for digital banking licenses to establish new banks in the cloud, but within reach through personal electronic devices, is therefore not surprising.

But the devil, as always, is in the details. Once people start to detail the process of removing the reams of paperwork that hang around bankers’ necks like a regulatory albatross, the initial enthusiasm for a digital-only banking model may fade a bit.

The intention here, however, is not to discuss the pitfalls of a digital-only banking model, but to address a more fundamental question of how to slice up and slice up banking licenses to create a more secure and secure banking system. more resilient. Digital banks will, at best, be only a subset of these bespoke banks.

First, let’s take a step back and look at the history of banking licensing in independent India. For a long time, India followed the uni-flavor bank. All of the banks listed were licensed as commercial banks, but labeled as different flavors of vanilla based on their ownership and pedigree.

So we had nationalized banks, private sector banks and foreign banks. When new banks were added in the 1990s as part of economic liberalization, they were affectionately referred to as “new (generation)” private sector banks to distinguish them from their older cousins. Perhaps the first effort to issue specialized licenses started with the Regional Rural Banks (RRBs) in the 1970s, spurred on by Indira Gandhi’s slogan “Garibi hatao”.

Then, in 1991, the Narasimham Committee recommended reorganizing the banking sector into global banks, national banks, and local and regional banks. However, these proposals remained largely on paper until last year, when the government attempted to merge the public sector banks (PSBs) into something vaguely similar to what Narasimham might have had in mind. .

Unfortunately, at that time, most PSBs were in such bad shape that instead of merging banks with complementary strengths and synergies as originally planned, they ended up merging banks with bearable weaknesses. . In the meantime, the government has also presented the Local Banks (LAB) proposal, a fuzzy idea and overly optimistic at best. A few LABs were put in place, but quickly faded away due to innate impairments in basic perception.

Finally, a few years ago, two other types of banks were introduced: payment banks and small financial banks (SFBs). While most payment banks have already disappeared from the radar, most SFBs are also struggling to stand out despite their alleged expertise in the field and lack of historical background.

All of this leads us to an irrefutable inference: that specialized banking licenses have repeatedly failed to work in India despite the best of intentions. The point is that, until now, the allocation of banking licenses has been based on the assets of the balance sheet, or the geographic area of ​​operations. This approach has not benefited both the banks and their customers.

It is time we started to think about licensing banks based on two questions: first, where will the money come from? Second, what will be done with this money? Ideally, we should have four types of banks: one, those that only operate in the retail space, that is, accept deposits from individuals and provide loans to individuals. Second, those who are pure wholesale players where no retail deposits are taken or no retail loans are given.

Three full-fledged commercial banks (universal banks) and four banking conglomerates – those which, in addition to commercial banking, are active in investment banking, capital markets, project finance, etc., directly or through through subsidiaries. Banks should be licensed and regulated differently depending on the above four categories to which they belong.

Capital requirements as well as liquidity and reserve requirements are also expected to change accordingly. Those who operate retail deposits may be instructed to keep less cash reserves but more capital buffers. However, those using wholesale funding should keep more cash, while the capital requirements can be moderate. In short, where the money comes from should be the first determinant of differential regulation, and how it is deployed should be the next.

As for digital banks, they can be a subset of retail banks to start and get into universal banking as the ecosystem evolves. But in the eyes of the regulator, they should only be one of the four categories listed above, regardless of which channel (s) they choose to use or avoid to connect with their customers.


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