Banking

Recently, the Reserve Bank of India has begun licensing a new kind of retail bank, called payments banks, for the hitherto financially excluded. The regulator’s argument that technological innovation will allow payments banks to achieve a seemingly impossible trilemma of financial inclusion while still being competitive and profitable is examined. The article concludes that amelioration of this trilemma will require the regulatory orientation to fundamentally change, and for the state to provide a kind of public good to all payments banks.

Is smaller still beautiful in the Indian banking sector?

The clandestine nature of sex work and the stigma surrounding it restricts access to and utilisation of financial services by female sex workers, and makes it more difficult for policymakers to design appropriate programmes for their empowerment. An examination of the factors that contribute to the utilisation of financial services focused on FSWs reveals that there is an urgent need to strengthen linkages with formal banking institutions for the financial inclusion and empowerment of FSWs.

While there has been a tremendous increase in the number of bank accounts opened, the data show that the average balance in these accounts is low and a significant proportion of the accounts are inoperative. Although there was a rise in the average deposits during demonetisation, they later settled at a lower level. Further, financial inclusion means not just the opening of bank accounts but, more importantly, access to credit from formal sources. The limited data available in this regard show that after the Pradhan Mantri Jan Dhan Yojana was launched there has not been any increase in the credit–deposit ratio and the share of small loans has continued to decline. Very few people have benefited from the overdraft facility that is supposed to be provided by the accounts under the scheme. Issues of access to banking in rural areas remain.

Competition is supposed to make banks more efficient and stimulate financial innovation by opening up of new markets. Given the dynamic changes within the Indian banking system in the last two decades, the effect of the developments in the market on the competitive behaviour of Indian commercial banks is assessed. The empirical analysis suggests monopolistic competition. This feature of the Indian banking market is consistent with other emerging-market economies and developing countries. We also find a decrease in competition across the two time-periods, before and after 2007. This may be attributed to the consolidation of the sector, with major banks acquiring smaller banks to gain economies of scale, market share and transaction volume.