His statement however has a political content and the importance of what he said could be assessed only in the context of the current election season. I will come to that later. However, one must get the background of what had been happening around fresh bank licences first.

Chidambaram had stated this in course of his address at the Bankcon, held in Mumbai. This is an annual event where bankers meet each other and they meet the government officials and hear the finance minister, After all, that is important since the government owns the major banks in this country.

Indian banking is at the cusp of a major change. Since Raghuram Rajan has taken over as governor of Reserve Bank, he spoke of the need for new banks and giving fresh licences to foreign banks to start operations in the country. He has also spoken of giving more play to global banks to improve banking services in India and modern the products range and services that banks offer.

Giving new branch licences, offering greater play to foreign banks will all bring in more banks into the already crowded space of Indian banking. We have the major public sector banks now around thirty of them, then there are those banks which were given licences freshly after the reforms started in 1991, Of course, we have the foreign banks which are operating in this country for as long as modern banking started. Some of the so-called foreign banks even had their beginning in this country only.

It is from this perspective that the issue of allowing new banks and giving fresh banking licences has to be seen. When the idea was mooted and RBI floated a discussion paper for public debate a number of issues were flagged off. The RBI raised the question whether existing Indian corporate houses would be allowed entry into banking. This was raised because it was feared that allowing corporates could result in a conflict of interests – that banks floated by them might use public money to fund their group business interests to the detriment of depositors.

Some of these issues now look somewhat settled. Corporates, for example, would be allowed to float banks so long they maintain an arms’ length distance in running their banks from their other businesses. Management structure of banks were also raised and resolved.

Finance minister Chidambaram’s statement about innovative banking as a criteria for giving new bank licences has to be read against this broad discourse which has been taking place for about a couple of years now. The actual decision about giving fresh bank licences is near at hand. Already some twenty-six applications for fresh licences are pending with the RBI. A high-level committee is examining each of these applications. A decision is awaited.

In his statement at the banking conference, he has underlined the importance of financial inclusion. What the finance minister has said boils down to that banks offering new models for financial inclusion should get precedence for grant of licence. Finance minister has pointed out:

‘We need banks that cater to communities. We need banks that cater to people in tribal populations. We need different banks to cater to the Northeast. We need banks that cater to the urban poor — their requirements are different from the requirements of the rural poor.

We need banks that cater mainly to farmer families. We need banks that cater to women.

I do not know how established major banks can quickly shift gears to cater to each one of these. Maybe, they cannot.’

Financial inclusion was attempted since the mid-sixties when Indira Gandhi has first brought banks under social control and then nationalised the major banks. Since then, schemes have been introduced to achieve financial inclusion. This in practice means giving banking services to those who have been ignored by the existing banks, particularly big banks.

However, things have changed radically since those days. Banking services through bank branches or credit to those who are poor and are not in position to provide collateral for taking loans, credit to farmers and farming communities – these have increased substantially.

In a recent address at a conference in Kolkata last month, RBI executive director, Deepali Pant Joshi gave a latest round up of what has been achieved. Bank branches in rural and unbanked areas have increased. A new system was started of appointing business correspondents who could offer select banking services where opening a new bank branch was not viable. The number of rural branches have increased catering to these communities. Farm credit and loans to small farmers gone up.

While these are laudable achievements, there have been some adverse side effects as well. These were not related to banking as such or bank borrowers, these were political in nature. Higher financial inclusion has raised th political vulnerability of banks as well. No less an authority than the union government has repeatedly waived farm loans, thereby creating a culture in which it is understood that bank borrowings may not have to be repaid. Government will waive repayment obligations. This is no good for building a sound banking culture. These only make the savings of the ordinary people vulnerable.

With this development, corporate loan waivers are also taking place as much flagrantly. Corporate debt restructuring is another way of writing off dues from corporate borrowers. And the amounts thus waive under CDR schemes are humongous. Whose money is going down the drain?

While Chidambaram talks of innovative banking and inclusion, he should also remember the round reality of bank loan losses through waivers and CDRs.

Fortunately, the new governor has sounded a note of caution. He pointed out that the loans losses of public sector banks were running at levels to high for comfort. The practice of rolling over due loans to some time later may absolve incumbent higher management. But it does encumber future ones. (IPA Service)