13 May Digital bank and inclusive banking concordant
Digital bank and inclusive banking concordant – Today Current Affairs
Last month, the union finance minister reiterated the government’s resolve to open 75 digital banks in 75 districts. Explaining the rationale for the initiative, the Reserve Bank of India (RBI) noted that the new digital banking units (DBUs) will improve the availability of digital infrastructure for accelerating and extending the delivery of banking services. Conceptually, a DBU can provide any banking product or service that can be delivered through the internet or mobile banking. The DBUs can also engage digital business facilitators or business correspondents to further expand their operations into unbanked areas.
The RBI guidelines now allow any scheduled commercial banks (excluding regional rural banks, local area banks, and payment banks) with past digital banking experience to open DBUs in Tier-1 to Tier-6 centers. The DBUs have the option to insource or outsource banking services facilities, but they are to be housed separately from the existing banking outlets. However, the DBUs can share their core banking system with incumbent systems and their governance and administrative structure are to be aligned with the digital banking activities of the promoter banks. The Hindu Analysis
The initiative to launch DBUs gained momentum soon after the Niti Aayog published a discussion paper on their licensing and regulation in November 2021. Noting that the technology stack for launching DBUs is already in place, the paper pointed out that the DBUs will help tackle some of the major policy challenges faced by the banking sector, like promotion of inclusive banking, and also help extend the use of digital technology to a larger segment of the population.
The launch of the DBUs is also broadly in line with the Nachiket Mor Committee Report (2014) that argued for a differentiated banking policy to support specialized banking institutions and expand financial inclusion. One of the offshoots of this policy was the creation of payment banks and small finance banks. The cost-efficiency of operations will now help DBUs to further extend credit to small ticket holders as well as micro and small business. This is crucial because the current credit gap in the micro, small, and medium industry sector alone is estimated to be a huge `25 trillion. The Hindu Analysis
However, while encouraging niche operations to promote inclusive banking can go a long way in nurturing inclusive banking and improving efficiency of operations, the problems of the sector are much more substantial. Despite repeated tweaking of the policy, the Indian banking sector has lost traction in recent years, while other financial sector segments like pension and mutual funds and stock markets have gained momentum.
One major indicator of the constraints faced by the banks is the stagnant level of bank credit available to the private sector. This has remained at around 50% of the gross domestic product (GDP) for around a decade now. In contrast, the domestic credit available to the private sector as a percentage of the GDP is substantially higher in our Asian neighbors like Singapore (120%), Malaysia (121%), Thailand (143%), South Korea (152%), and China (165%). The larger credit available to the private sector in these countries is broadly in line with that in developed countries like France (108%), Sweden (133%), the United Kingdom (UK) (134%), Japan (177%), and the United States (US) (191%).
However, Indian banks perform more reasonably in the case of many other efficiency parameters. Numbers for the last decade ending 2020 show that the after-tax return on bank assets averaged 0.5% in India, which was higher than in Germany, France, the UK, Switzerland, and Japan but marginally less than in South Korea, Singapore, and Sweden and only less than half of that in China, Russia, and the US. Similarly, the after-tax return on bank equity was 7% in India during this period. This was higher than in Germany, Japan, France, Switzerland, and the UK but lower than in Russia, Singapore, Sweden, and the US and just around half that in China. The Hindu Analysis
Other efficiency indicators like the ratio of the bank overhead costs to total assets and the bank cost to income ratio show contrasting results. The ratio of bank overhead costs to total assets of 1.8% in India was higher than that in Germany, Japan, France, China, Singapore, and the UK and generally similar to that in South Korea and Switzerland but lower than that in Russia, Sweden, and the US. But when it comes to the cost to income ratio of banks, India’s ratio of 46% was slightly higher than that of China and similar to that of Singapore but significantly lower than that of the US, France, Russia, Switzerland, Germany, the UK, South Korea, Japan, and Sweden.
A closer analysis of the reasons for the constraints on the availability of bank credit shows that the large share of non-performing assets is a major hurdle to the expansion of the credit markets. In fact, the one major parameter where the Indian banks have consistently and grossly underperformed than its peers is in the case of non-performing loans or assets. Trends over the last decade ending 2019 show that the ratio of non-performing loans to gross loans averaged 6.1% in India, 1.4% in China, 3.3% in Brazil, 3.8% in South Africa, and 8.1% in Russia. Among the developed economies, it was the lowest in South Korea (0.5%) followed by Switzerland (0.7%), Sweden (0.8%), Singapore (1.4%), Japan (1.8%), the US (2.1%), Germany and the UK (2.2% each), and France (3.7%).
Clearly, the government and the central bank have to delve deeper to find solutions to these major issues that handicap the Indian banking sector.
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plutus ias daily current affairs 13 May 2022
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