<div><em>The idea behind differentiated banking licences is to be imbibed</em></div><div> </div><div>The days of state-run banks being all things to all comers may well be nearing its end. Even as the Reserve Bank of India (RBI) prepares to issue differentiated banking licenses, Governor Raghuram Rajan made it clear that there is no reason why the concept can’t be applied to the universe of state-run banks.</div><div> </div><div>“The government is certainly focussed on that… you shouldn’t be able to walk into a branch (of state-run bank) and not know which bank it is. You should be able to walk in and know `this is different from the previous one I walked into", said Rajan.</div><div> </div><div><strong>Say Bye To One-size-fit-all Banking</strong></div><div>Bank nationalisation in 1969 and 1980 saw the spread of banking to unbanked areas. Despite that a large swathes of the country’s population continue to be out of its ambit. Differentiated banks are seen a way to bridge the gaps efficiently rather than license scores of full-service banks with a pan-Indian footprint – the costs of such a model are significantly high when compared to a niche “differentiated bank”. The differentiation could be on account of capital requirement, scope of activities or area of operations.</div><div> </div><div>While Mint Road will soon issue “differentiated bank licences”, Rajan was of the view that the idea behind it can be adopted by state-run banks too. “The first stage is to pick boards (professional) and find ways to differentiate”, said Rajan.</div><div> </div><div>The Governor’s statement should be seen in the context of the capital requirements that state-run banks would need on account of Basel-111. RBI estimates have put it at Rs 5-lakh crore, but it is not a constant and would vary on the basis of credit offtake, bad-loans provisioning and the like.</div><div> </div><div>The truth is that fisc can’t support fund infusion into state-run banks as they have in the past. As the M. Narasimham Committee-2’s (1998) report on banking reforms noted: “Given the dynamic context in which banks are operating, further capital enhancement would be necessary for the larger Indian banks. Against the background of the need for fiscal consolidation and given the many demands on the budget for investment funds in areas like infrastructure and social services, it cannot be argued that subscription to the equity of state-run banks to meet their enhanced needs for capital should command priority.”</div><div> </div><div>A view has been expressed that perhaps it’s time for state-run banks, especially the weaker among them to focus on niche areas. While it does not legally make them “differentiated bank license” holders, operationally they become such an entity.</div><div> </div><div>What Governor Rajan has in effect articulated to state-run bank is: decide what kind of a bank you want to be.</div>
