Differentiated bank licences a welcome move

It is welcome that the Reserve Bank of India (RBI) has initiated the process of granting differentiated bank licences by issuing draft guidelines. India’s banking sector is too small, too closed and much too uniform to reach out to the vast unbanked masses who fall prey to financial scams of various kinds, in the absence of access to formal finance. To create the agility and flexibility the banking sector needs, the Nachiket Mor committee recommended the creation of different kinds of banking, some carrying out limited functions, such as payments, and others focusing on small geographies or client groups. The draft guidelines issued by the RBI draw on the report.

This newspaper has favoured, for years, leveraging the ability of telecom companies to make big money out of zillions of small transactions to achieve financial inclusion, by giving them or their joint ventures with proper banks, a banking licence. Several of them have started offering financial services of a limited variety, working with licensed banks. The new RBI stance on licensing will allow them to operate these services on their own. The prepaid SIM on the phone carries a deposit that can be run down for any number of purposes and across geography, limited in scope only by regulation. A banking licence will allow a telecom company to realise in full the phone’s ability to function as a portable electronic vault that can be charged remotely and run down to make all kinds of payments.

The only trouble with harnessing technology for remote area banking is the vulnerability of electronic networks to hacking. The RBI will have to draw up effective, stringent cyber security standards and not delegate them to technology firms, focusing on procedural protocols needed to give technological solutions teeth.