The International journal of analytical and experimental modal analysis ISSN NO: 0886-9367
Differentiated Banking License for Financial Inclusion – A study
Author Co-Author Kittu R S Smt. Dr. Mahananda B Chittawadagi Research Scholar Associate Professor and Research Guide Department of Commerce Department of Commerce KLE Society‟s S. Nijalingappa College KLE Society‟s S. Nijalingappa College Rajaji Nagar, Bangalore- 560010. Rajaji Nagar, Bangalore- 560010. Email: [email protected] Email: [email protected] Mobile: 9844336694 Mobile: 9980129807
Abstract:
Financial inclusion plays a key role in inclusive development of the country. In order to induce habit of saving and switching to formal sources of credit with the unbanked population, many of the recently introduced benefit transfer schemes like direct benefit transfer scheme, etc. have need of mandatory ownership of bank accounts to receive the benefits. The accessibility of quality financial services in rural areas is particularly essential for the growth of the economy as this will enable the large number of rural households to fund the expansion of their livelihoods. The development of the economy is dependent on the escalation of the rural market in the country. Therefore better financial inclusion in these segments is essential.
The genesis of the present approach to financial inclusion can be traced to the Government of India and Reserve Bank of India initiatives, which generally described the main goals of inclusive finance as access to a range of financial services with savings, credit, insurance, transfer of funds and other banking / payment services to all bankable households and enterprises at a minimum cost. Secure proximity of differentiated banks like small finance banks, especially in rural areas, would ease the procedure of transmission of benefits to the poor. Differentiated banks are cipher of Government and RBI‟s efforts towards financial inclusion of ample.
The main objective of this study is to review a variety of papers on the how financial inclusion serves as a means of inclusive growth and to study the initiatives taken by Government and Reserve Bank of India for strengthening financial inclusion in the country. The study is based on secondary sources of data collection.
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Key words: Differentiated Banks, Financial Inclusion, Payment Banks and Small finance Banks
Introduction:
Financial inclusion (FI) may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.
Financial Inclusion refers to universal access to a wide range of financial services at a reasonable cost. These comprise not only banking products but also other financial services such as insurance and equity products.
Reserve Bank is aware of this aspect and is committed to financial inclusion and is exploring various possibilities to foster inclusion of the un-served and under-served population and areas and facilitate provision of affordable financial services by increasing competition among the banks and encourage innovative approaches (including channels, products, interface, etc.).
The Government of India and the Reserve Bank are clear that financial inclusion is a huge prerequisite and therefore all financial sector participants will have to put in consistent efforts in that direction. The Reserve Bank created a favorable and enable situation for access to financial services to expand door step banking facilities in all the unbanked villages in a phase-wise manner. The Reserve Bank has positive banks to adopt a structured and planned move toward to financial inclusion with assurance at the highest levels through preparation of board approved financial inclusion plans (FIPs).
The first stage of FIPs was enforced over 2010-13. The Reserve Bank has used FIPs to estimate the routine of banks under their FI initiatives. With the achievement of the first phase, a huge banking network has been shaped and a large number of bank accounts have also been opened. However, it has been pragmatic that the accounts opened and the banking infrastructure created has not seen considerable operations in terms of transactions. In order to persist with the progression of ensuring meaningful access to banking services to the excluded, banks were advised to draw up fresh three-year FIPs for 2013-16. Banks were also advised that the FIPs prepared by them are disaggregated and percolate down to the branch Volume XI, Issue XII, December/2019 Page No:3637 The International journal of analytical and experimental modal analysis ISSN NO: 0886-9367
level so as to make sure the contribution of all the stakeholders in FI efforts and also to ensure standardization in the reporting structure under FIPs. The hub under the new plan is now added on the volume of transactions in the large number of accounts opened.
While thus the Financial Inclusion efforts all the way through the presented set of banks have been constant, the Reserve Bank is cognizant of the position that these may not be adequate to speed up the process and accomplish the goals early. Hence RBI issued differentiated banking licenses to various financial institutions to boost financial inclusion.
Review of literature:
IIMB-WP N0. 474 Prof. Charan Singh, has examined as the greater part of the rural population is still not included in the complete growth, the concept of financial inclusion becomes a dare for the Indian economy. Many intensive actions are initiated by the Reserve Bank of India and Government of India in favor of financial inclusion but the impact of these did not yield suitable results. He spotlight on utilizing the presented resources such as Banking Technologies, Mobile phones, India Post Office, Fair Price Shops and Business Correspondents thereby creation it more capable and user friendly for the interest of the rural population as well as the formal sector.
Purvi Shah and Medha Dubhashi, explain concerning the genesis of the present advance to financial inclusion can be traced to the United Nations initiatives, which broadly described the foremost goals of comprehensive finance as access to a range of financial services including savings, credit, insurance, remittance and other banking / payment services to all bankable households and enterprises at a sensible cost. The accessibility of eminence financial services in rural areas is enormously vital for the growth of the economy as this will make possible the huge number of rural households to fund the growth of their livelihoods.
Dr. R Ramakrishnan, he explains Differentiated Banks and Financial Inclusion There are vast unmet possible lying in the rural areas for financial institutions. If financial institutions possibly will successfully tap this potential there would be a situation for institutions and people. Financial inclusion bringing additional people into the formal financial system by generous individuals tools to cope with everyday requirements and increases the likelihood of their access to education, health services and employment.
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Shri R. Gandhi, Deputy Governor at Sastra University, Campus Kumbakonam on April 18, 2015. Assistance provided by Ms Sara Rajendra Kumar is gratefully acknowledged. State thoughts concerning what are issues and challenges faced by differentiated banks and it is decisive that the financial system is supple and aggressive to cope with multiple objectives and demands made on it by various constituents of the economy. However, in a country like India where here exists differentiated markets and customer groups, the idea may have to be contextualized according to the needs of the customers.
Dr. Dhiraj Jain Associate Professor, Pacific Business School, Udaipur “Differentiated Bank Licenses: Emergence of a New Bank Structure”. In this article he explain regarding the issue of new bank licenses is extremely responsive as India is an under banked country. The idea in the wake of the licensing command was that the basic principles of bank ownership and governance, viz. the 'fit and proper' criterion, are not dilute.
A Government of India‟s High Level Committee on Financial Sector Reforms headed by Dr Raghuram Rajan has submitted its report in 2008 titled “A Hundred Small Steps”. Among its a variety of recommendations, the Committee suggested that there is a require for pattern shift in the policy for financial inclusion. It said the prominence should be shifted from large-bank-led, public-sector-dominated, mandate-ridden, branch-expansion-focused strategy. It said the poor need efficiency, innovation, and value for money which can come from motivated financiers who have low cost structure and thus see poor as profitable, but who also have the ability to build decisions quickly, and with minimum paperwork.
Objectives of the study: To understand the concept of differentiated banking license To know the guidelines towards differentiated banking license To study the impact of differentiated banking license on financial inclusion. To know the extension level of differentiated banks branches to rural area.
Methodology: The present study is based on the secondary data only. It is collected through various books, journals, articles, and related websites.
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Differentiated Banking Licenses Differentiated banking license, it refers to the system of different licenses for unlike sub sectors of the banking segment such as small finance banks and payment banks etc. There are several countries where different licenses are issued for Commercial or Saving Banks, Rural Banks or for Credit Unions. In convinced countries, no division is made between domestic and foreign banks. Thus, there is no widely conventional recommended model offered internationally. Advocates of this system say that many banks keep the plain vanilla banking as a small and an essential addition. Banks providing services to retail customers have different skill sets and risk profiles as compared to banks which mainly deal with large corporate clients and hence there should be a system of differentiated licensing.
The RBI-constituted Nachiket Mor Committee for financial inclusion first mooted the thought of having differentiated banks in the country. The panel's suggestions contain specialized payment banks, retail banks, wholesale banks, infrastructure banks etc. Though the RBI has not yet issued any clear cut guidelines on differentiated banks or 'on-tap' licenses, the governor claims it will be done by the end of 2014. This initiative by the RBI would be able to fulfill the broader objective of financial inclusion and help make India a better banked country. Issuance of License on the situation that the bank will open at least 25% of its branches in rural is a good mode to make stronger banking services in those places. Use of technology and contemporary infrastructure amenities in addition to core banking solutions and a variety of delivery channels will help improve customer service. While healthy competition among banks can be good for the customer in terms of products and services, it can prove counterproductive for banks, making some branches unviable.
Finally RBI in 2014 to issue the in principle approval were issued to 11 organization as payment banks, 10 organization as small finance banks and 2 micro finance institution as banks to enhance the financial inclusion. Since April 2014, the Reserve Bank of India has granted 23 banking licenses to new players - two were given the in principle approval to micro finance institution are IDFC and Bandhan as banks (April 2, 2014), 11 were issued payments banks licenses to Aditya Birla Nuvo, Fino PayTech, National Securities Depository, Reliance Industries, Dilip Shantilal Shanghvi, Tech Mahindra, Vodafone M-pesa, Airtel M Commerce, Department of Posts, Vijay Shekhar Sharma, Cholamandalam Distribution (August 19, 2015) and 10 were given licenses for small finance banks to Au Financiers, Suryoday Micro Finance, Capital Local Area Bank, Disha Microfin, Equitas Holdings, ESAF Microfinance and Investments, Ujjivan Financial Services, Janalakshmi
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Financial Services, Utkarsh Micro Finance, RGVN (North East) Microfinance (September 16, 2015). The niche banks - small finance and payments banks -have been set up to further the regulator's objective of deepening financial inclusion.
Differentiated Bank Licensing Policy
The RBI received 41 applications for payments bank license and 72 for small finance bank license. The RBI received recommendations from the external advisory committee on payments banks chaired by former banker Nachiket Mor and on small finance banks headed by Usha Thorat, former Deputy Governor of RBI. A number of corporate houses and a host of payment wallet companies have applied for payments bank licenses. Many banks have formed joint ventures with the applicants.
Payments Banks
On, August 19, 2015, Reserve Bank of India granted „in-principle‟ approval to 11 applicants to start a payments bank. The Committee of the Central Board (CCB) of RBI has selected 11 entities that have the reach and the technological and financial strength to provide service to the customers and promote government‟s initiative of financial inclusion across the country. These banks are expected to reach customers mainly through their mobile phones rather than traditional bank branches. The selected 11 applicants are:
1. Reliance Industries 2. Airtel M Commerce Services 3. Tech Mahindra 4. Vodafone m-pesa 5. Aditya Birla Nuvo 6. Department of Posts 7. Cholamandalam Distribution Services 8. Fino PayTech 9. PayTm 10. National Securities Depository Ltd (NSDL) 11. Sun Pharma
Out of these 11 applicants, Tech Mahindra Ltd, Cholamandalam Investment and Finance Co and billionaire Dilip Shanghvi have opted out.
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RBI Guidelines for Payment Banks: RBI has given „in principle‟ approval to these 11 applicants to set payment banks and approval is valid for 18 month period. The payments banks will be able to take deposits and remittances, internet banking and other specified services but cannot undertake lending services. Their holdings are restricted to a maximum balance of Rs 1 lakh per individual customer. They can issue ATM/debit cards but not credit cards and can also issue other prepaid payment instruments. They can distribute non-risk sharing simple financial products like mutual funds and insurance products. Non resident Indians will not be allowed to open accounts in payment banks. It is mandatory for payment banks to hold minimum capital of Rs. 100 crore. FDI of 74 per cent is allowed in payment bank.
Small Finance Banks On September 17, 2015 The Reserve Bank of India (RBI) has granted in principle approval to 10 entities to set up small finance banks to provide basic banking services to small farmers and micro industries. The in-principle approval will enable these entities comply with the guidelines on Small Finance Banks and will be valid for 18 months.
10 entities are:
1. Au Financiers (India) Ltd 2. Capital Local Area Bank 3. Disha Microfin Private Ltd 4. Equitas Holdings P Limited 5. ESAF Microfinance and Investments Private Ltd 6. Janalakshmi Financial Services Private Limited 7. RGVN (North East) Microfinance Limited 8. Suryoday Micro Finance Private Ltd 9. Ujjivan Financial Services Private Ltd 10. Utkarsh Micro Finance Private Ltd. As per RBI guidelines, the small finance banks can provide basic banking services in order to promote financial inclusion. It will include services like accepting deposits and lending to the
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unbanked sections such as micro business enterprises, small farmers, micro and small industries and unorganized sector entities. RBI Guidelines for Small Finance Banks: Take small deposits and disburse loans Distribute mutual funds, insurance products andother simple third-party financial products Lend 75% of their total adjusted net bank credit to priority sector Maximum loan size would be 10% of capital funds to single borrower, 15% to a group Minimum 50% of loans should be up to 25 lakhs Cannot lend to big corporate and groups Other financial activities of the promoter must not mingle with the bank It cannot set up subsidiaries to undertake non-banking financial services activities Cannot be a business correspondent of any bank
Analysis and Interpretation: Table 1: Population per Bank (The population served per bank is way higher in rural areas compared to urban branches)
Rural Semi Urban Urban Metropolitan 15,800 5,200 4,100 3,900
Graph 1: Population per Bank
Metropolitan 3,900
Urban 4,100 Rural 15,800 Semi Urban 5,200
Source: RBI Census: Quantta Analytics as on Sept 2017
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Table 2: Banks in rural India by bank group
Small Finance Banks 0.24% Local area Banks 0.02% Foreign Banks 0.02% National Banks 42.44% New Private Sector Banks 7.03% SBI and its associates 16.02% Regional rural Banks 30.47% Other Public Sector Banks 0.85% Old Private Sector Banks 2.91%
Graph 2: Banks in rural India by bank group 2.91% 0.85% 0.02% 0.02% 0.24% Small Finance Banks
Local area Banks
Foreign Banks 30.47% 42.44% National Banks
New Private Sector Banks
SBI and its associates
Regional rural Banks
Other Public Sector Banks 16.02% Old Private Sector Banks 7.03%
Source: RBI Census: Quantta Analytics as on Sept 2017
Table 3: Banks by Region
Central Eastern North- Northern Southern Western Eastern 11,844 10,161 1,685 9,041 10,517 5,817
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Graph 3: Banks by Region
14,000 12,000 10,000 8,000 6,000 4,000 Series1 2,000 0
Source: RBI Census: Quantta Analytics as on Sept 2017
Table 4: Population per Bank by Region
Central Eastern North-Eastern Northern Southern Western 19,400 19400 22,300 10,900 11,800 15,800
Graph 4: Population per Bank by Region
25,000
20,000
15,000
10,000 Series1 5,000
0
Source: RBI Census: Quantta Analytics as on Sept 2017
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Interpretation:
As per the analysis the bank branches have not extend much in rural. Just 1/3 of bank branches available in rural areas. Its show how the majority of banking branches essential towards rural population. The population served per bank is way higher in rural areas compared to urban branches. This description represent banks by located based on region in central India has the majority number of rural branches and in the north eastern region is very less spread bank branches to rural. A greater part of the banks in rural areas are in the public sector banks. North eastern region is the most terrible in terms of population served per bank.
Conclusion:
There is huge unmet potential requiring lying in the rural areas and other unbanked centres which necessities to be tapped. To valve this unmet require for financial services, it is felt that it is implication experimenting on new types of institutions for financial inclusion. However, in a country like India where there exists differentiated markets and customer groups, the idea may have to be contextualized according to the needs of the customers. As relating to the strength of the differentiated banks, there is need for creating a sense of equilibrium between long term sustainability and the financial inclusion objectives. It is fetching more and clearer that addressing financial exclusion will require a holistic loom on the part of the banks in creating perception about financial products, services, education, and plan on money management, debt analysis, savings and reasonable credit.
The banks would have to develop exact pioneering ideas to expand the outreach of their services in order to support financial inclusion. Still RBI and Government of India need to extra thoughtfulness on to extent the financial services to rural and to have need of support of awareness programs towards ensure access to financial services and timely and enough credit where requisite by vulnerable groups such as weaker sections and low income groups at an affordable cost.
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References Journals and Articles:
1. Chakrabarty K.C (2013), “Financial Inclusion in India: Journey So Far and the Way Forward”, Key note address at Finance Inclusion Conclave Organised by CNBC TV 18 at New Delhi. 2. Chakrabarty K.C (2013), “Revving up the Growth Engine through Financial Inclusion”, address at the 32th SKOCH Summit held at Mumbai. 3. Department of Finance,( 2013) Gitam Institute of Management, Gitam University. “Financial Inclusion in India: Challenges and Strategies”. 1st ed., Excel Books, New Delhi. 4. Dr. Dhiraj Jain (June 2014) Associate Professor, Pacific Business School, Udaipur Pacific Business Review International Volume 6, Issue 12, Udaipur. 5. Lazar Daniel and P. Palanichamy (Mar 2014) Micro Finance and Poverty Eradication New Century Publications, Pondicherry University, Pondicherry, India. 6. Narayan Chandra Pradhan (2013), “Persistence of Informal Credit in Rural India: Evidence from All-India Debt and Investment Survey and Beyond”, RBI Working Paper Series, WPS (DEPR): 5/2013 7. Raghuram G. Rajan (2009), “A Hundred Small Steps - Report of the Committee on Financial Sector Reforms”. 8. Rangarajan C (2008), “Report of the Committee on Financial Inclusion” 9. Reserve Bank of India Banking Structure in India - The Way Forward accessed from rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/DPBS27082013_F.pdf. Reference Books:
1. Dr. M.S.V. Prasad and Dr. G.V. Satya Sekhar (2016) “Financial Inclusion in India” Gitam Institute of Management, Gitam University. 2. M.N. Gopinath (2015) “Banking Principles and Operation” Snow white publication, 6th edition.
Web Sources:
1. http://www.rbi.co.in 2. http://www.businessstandars.com 3. http://www.businesslines.com 4. http://www.economist.com 5. http://us.sagepub.com 6. http:/www.researchgate.net
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7. http://shodhganga.inflibnet.ac.in 8. http://ssrn.com/author 9. http://currentaffairs.gktoday.in/category/banking-current-affairs/ 10. http://www.indianeconomy.net/splclassroom/160/what-is-differentiated-bank-license- policy/ 11. http://www.indiainfoline.com/article/news-top-story/niche-banks-not-a-new-concept- rbi-plans-to-license-more-differentiated-banks-116040500697_1.htm 12. http://www.thehindubusinessline.com/money-and-banking/rbi-to-declare-one-set-of- differentiated-bank-licences-in-aug/article7499188.ece 13. http://www.business-standard.com/article/pti-stories/rbi-issues-operating-guidelines- for-differentiated-banks-116100601206_1.html 14. http://www.thehindubusinessline.com/money-and-banking/new-categories-of- differentiated-banks-under-consideration/article9449692.ece
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