Banking Reforms: The Real Metrics

Context:  Reserve Bank of India (RBI) released a report of its Internal Working Group (IWG) on ownership guidelines and corporate structure of Indian private-sector banks.

 Recommendations of IWG

• Allow large corporate/industrial houses to become promoters of banks.
• Give bank licences to Non-Banking Finance Companies (NBFCs).
• Conversion of payment banks to small finance banks; after three years of operations.

Recent Banking reforms:

• Reforms in Urban Cooperative Banks (UCBs): Allowed for the conversion of urban cooperative banks (UCBs) into small finance banks and the RBI was given complete control over UCBs.
• Privatisation: of some of the smallest Public Sector Banks(PSBs).
• Allowing takeover by foreign banks: Recently, RBI allowed DBS of Singapore to take over the ill-managed Lakshmi Vilas Bank.

 Problems associated with the implementation of banking reforms:

• Lag in implementation: Due to the heavyweight incumbents' lobby trying to keep out competition.
• g. A discussion paper on new banks was issued in 2010, but only two new banks were licensed under the new norms, that too in 2015.
• Technical issues: associated with licensing more banks, allowing business houses into banking, allowing different categories of banks and putting caps on controlling stakes.
• Cost and Quality: Whether the policies would lead to the better customer experience at a low relative cost is unknown; the process of redress is frustrating and acts against the financial consumers.
• Governance issues in bank boards: as reported by the P J Nayak committee in 2014.
• Lack of customer protection law for financial products: There were widespread criticisms of mis-selling of Life insurance by new private banks.

Conclusion: RBI should set up a working group to measure whether competition is driving better products and services at lower costs.