Does RBI ease or complicate the bank branch policy?

One of the many items of Dr Rajan’s speech was to ease the bank branch regime in India. he said:

The Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision making. The RBI will shortly issue the necessary circular to completely free bank branching for domestic scheduled commercial banks in every part of the country. No longer will a well-run scheduled domestic commercial bank have to approach the RBI for permission to open a branch. We will, of course, require banks to fulfil certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, and we will restrain improperly managed banks from expanding until they convince supervisors of their stability. But branching will be free for all scheduled domestic commercial banks except the poorly managed.

On reading this, some experts said that is how one should do reform – uncluttered and simple.But this was said without really reading the final guidelines and that is where the so called masala is.

So RBI released a circular on Sep 19, 2013 giving these guidelines. They allow banks to open branches freely in Tier A cities given certain restrictions. Spot the differences between earlier policy and recent policy (like those you get in magazines etc:

Earlier policy:

Opening of branches by domestic scheduled commercial banks (other than RRBs) in Tier 1 centres (centres with population of 100,000 and above as per Census 2001) will continue to require prior permission of Reserve Bank of India. Authorisation for opening branches in Tier 1 centres will not generally exceed the total number of branches proposed to be opened in Tier 2 to Tier 6 centres as well as in the rural, semi-urban and urban centres in the North-Eastern States and Sikkim. While issuing such authorisation, Reserve Bank will continue to factor in whether at least 25 percent of the total number of branches to be opened during a year are proposed to be opened in unbanked rural centres as also regulatory and supervisory comfort and critical assessment of bank’s performance in financial inclusion, priority sector lending and customer service, etc.

New policy:

a) At least 25 percent of the total number of branches opened during the financial year (excluding entitlement for branches in Tier 1 centres given by way of incentive as stated in para 4 below), must be opened in unbanked rural (Tier 5 and Tier 6) centres, i.e. centres which do not have a brick and mortar structure of any scheduled commercial bank for customer based banking transactions.

b)   The total number of branches opened in Tier 1 centres during the financial year (excluding entitlement for branches in Tier 1 centres given by way of incentive as stated in para 4 below) cannot exceed the total number of branches opened in Tier 2 to 6 centres and all centres in the North Eastern States and Sikkim.

4. As there is a continuing need for opening more branches in underbanked districts of underbanked States for ensuring more uniform spatial distribution, banks would be provided incentive for opening such branches. Accordingly, banks may open branches in Tier 1 centres, over and above their eligibility as defined at para 3 (a) and (b) above, that are equal to the number of  branches opened in Tier 2 to Tier 6 centres of underbanked districts of underbanked States, excluding such of the rural branches opened in unbanked rural centres that may be located in the underbanked districts of underbanked States in compliance with the requirement as indicated in para 3 (a)  above.  

5. Banks have to ensure that all branches opened during a financial year are in compliance with the norms as stipulated above. In case a bank is unable to open all the branches it is eligible for in Tier 1 centres, as per paras 3 and 4 above, it may carry-over (open) these branches during subsequent two years.

6. Banks, which for some reason are unable to meet their obligations of opening branches in Tier 2 to 6 centres in aggregate, or in unbanked rural centres (Tiers 5 to 6 centres) during the financial year, must necessarily rectify the shortfall in the next financial year.  

7. This general permission would be subject to compliance with the parameters stated in para 3 and 6 above as well as regulatory/supervisory comfort in respect of the individual banks.  RBI would have the option to withhold the general permission now being granted to banks which fail to meet the above mentioned criteria along with imposing  penal measures on banks which fail to meet the obligations at paras 3 and 6 above.  

Confused. Here is a simpler comparison:

New Policy Old Policy
  Opening of branches by domestic scheduled commercial banks (other than RRBs) in Tier 1 centres (centres with population of 100,000 and above as per Census 2001) will continue to require prior permission of Reserve Bank of India.
a) At least 25 percent of the total number of branches opened during the financial year (excluding entitlement for branches in Tier 1 centres given by way of incentive as stated in para 4 below), must be opened in unbanked rural (Tier 5 and Tier 6) centres, i.e. centres which do not have a brick and mortar structure of any scheduled commercial bank for customer based banking transactions. While issuing such authorisation, Reserve Bank will continue to factor in whether at least 25 percent of the total number of branches to be opened during a year are proposed to be opened in unbanked rural centres as also regulatory and supervisory comfort and critical assessment of bank’s performance in financial inclusion, priority sector lending and customer service, etc
b)   The total number of branches opened in Tier 1 centres during the financial year (excluding entitlement for branches in Tier 1 centres given by way of incentive as stated in para 4 below) cannot exceed the total number of branches opened in Tier 2 to 6 centres and all centres in the North Eastern States and Sikkim.  Authorisation for opening branches in Tier 1 centres will not generally exceed the total number of branches proposed to be opened in Tier 2 to Tier 6 centres as well as in the rural, semi-urban and urban centres in the North-Eastern States and Sikkim.
4. As there is a continuing need for opening more branches in underbanked districts of underbanked States for ensuring more uniform spatial distribution, banks would be provided incentive for opening such branches. Accordingly, banks may open branches in Tier 1 centres, over and above their eligibility as defined at para 3 (a) and (b) above, that are equal to the number of  branches opened in Tier 2 to Tier 6 centres of underbanked districts of underbanked States, excluding such of the rural branches opened in unbanked rural centres that may be located in the underbanked districts of underbanked States in compliance with the requirement as indicated in para 3 (a)  above.  
5. Banks have to ensure that all branches opened during a financial year are in compliance with the norms as stipulated above. In case a bank is unable to open all the branches it is eligible for in Tier 1 centres, as per paras 3 and 4 above, it may carry-over (open) these branches during subsequent two years.  
6. Banks, which for some reason are unable to meet their obligations of opening branches in Tier 2 to 6 centres in aggregate, or in unbanked rural centres (Tiers 5 to 6 centres) during the financial year, must necessarily rectify the shortfall in the next financial year.  
7. This general permission would be subject to compliance with the parameters stated in para 3 and 6 above as well as regulatory/supervisory comfort in respect of the individual banks.  RBI would have the option to withhold the general permission now being granted to banks which fail to meet the above mentioned criteria along with imposing  penal measures on banks which fail to meet the obligations at paras 3 and 6 above.  

Phew…talk about simplicity!!

Moreover, there is not even much difference between the two even if get through the words (somehow). Banks can freely open branches in Tier I cities provided they fulfil the several conditions. How is it any different from the condition that banks need permission from RBI to open branches in Tier-1 provided they fulfill the inclusivity conditions..looks just ornamental to me..

The point is this. I am not saying inclusiveness is not important and should be done away with. Without it my home town would have just had public sector banks and no private sector ones. Infact without 1969 policy forcing banks to open cities in rural areas, perhaps there would be no public sector banks either.

The real issue is to write these changes clearly and make it less wordy.  Jut concise and clear explaining the changes clearly. Keep the legal jargon as part of the annexes or have a simpler version at the annexe clearly mentioning the change..

Banking is also Dr. Rajan’s expertise. So hopefully we get a clearer explanation next time..

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