New bank licences may be contingent on rural expansion

Industrial houses that promise a greater commitment to financial inclusion may have a better chance of securing banking licences, as the finance ministry wants to include stringent conditions to ensure that new banks do not merely add to the already crowded urban space, according to a report.

Finance minister Pranab Mukherjee will soon review the proposals before they are sent to the Reserve Bank of India. ''We want to urge the central bank to look at this aspect (financial inclusion) before granting any new licenses,'' an unnamed finance ministry official told The Economic Times, adding that there are concerns that large corporate houses may not be interested in financial inclusion.

The finance ministry is likely to suggest to the RBI that it set stringent conditions which would enforce banks to open branches in rural areas. ''The approach should be similar to what happened when the aviation sector was opened for private players,'' the official said. Just as the airlines were asked to fly a certain minimum unprofitable routes, the new banks may be asked to go to under-banked areas.

As of now only 30 per centof bank branches are in rural areas, which account for 72.2 per cent of the country's population. Rural India accounts for just 9 per cent of total deposits, 7 per cent of total credit and 10 per cent of life insurance business.

The central bank is already aware of the concerns and has flagged the issue in the discussion paper it has put out to invite comments on entry of new banks in the private sector. ''The industrial and business houses may not be committed to attaining broader objectives of financial development particularly ensuring financial inclusion and providing services to all sections of society,'' the discussion paper notes.

The ministry has also outlined the views on minimum capital requirement, promoter's shareholding and foreign participation in the new banks. ''The idea is to distill the RBI's approach and ensure that norms should not be too stringent,'' the official said.