Monday, July 27, 2009

RBI's Branch 'Expansion' policy.

What is RBI's branch expansion policy?
As per this policy,RBI uses a list of underbanked districts (last compiled in 2001) to try and force banks to open branches in areas which apparently they are reluctant to serve.

  • Even today, 378 out of 603 districts are classified as underbanked despite the fact that Indian economy has more than doubled and its structure changed significantly since the list was last prepared.As an inspector of Banking, granting licenses, RBI should be aware of the current status of Banking penetration and base its policy on that.

  • Among other things,RBI defines an administrative office and controlling office as a branch and hence required to be requiring its license.

  • Since demand for Banking services is huge and supply perpetually low, number of branches is the golden key to profits. Instead of relying on explicit regulatory mechanism RBI uses Branches as chocolates to be distributed among well behaved kids. One major crierion for award of branches is:
    services provided by banks to common persons, particularly in underbanked areas (districts), actual credit flow to the priority sector, pricing of products and overall efforts for promoting financial inclusion, including introduction of appropriate new products and the enhanced use of technology for delivery of banking services.

    Branch license is probably a kill all solution and instead of explicit actions RBI seems to be saying do whatever you like, I ll see you at the end of year when you come to me for getting license. Only charitable comment about this can be that RBI is plain lazy.

  • RBI,busy as it is, only accepts the applications for branch licenses only once a year and owing to its benevolence,applications for underbanked districts are selected throughout the year.

  • Since agriculture now constitutes 25% of our GDP, probably thats why, 25% of the branches are to be setup in rural or semi-urban areas.Even in 2001, Punjab though rural has only 1 district that is underbanked,while Maharashtra has more than half of its districts underbanked(26). So branches are proportional to economic activity; why this hang up with rural/urban?As a result, while demand for banking services increases in one segment of society, RBI is adamant not to let market cater to it.

  • In case of mergers,the licence (if separate licence has been issued) ) of the merged branch (transferor branch) should be surrendered to the Regional Office concerned of RBI.Maybe RBI can learn something from TRAI here and vice versa.

  • As a matter of policy, closure of even loss making branches at rural centres having a single commercial bank branch (excluding Regional Rural Bank branch) is not permitted, as closure would render the centre unbanked.

    Banks are permitted to close any branch in metropolitan, urban and semi-urban (not assigned responsibility under Government sponsored programme) centres without seeking prior approval from RBI.
    RBI street is one way only-->underbanked/unprofitable districts.

The latest policy is here. A related column on Bank Nationalisation.