Raghuram rajan panel want Smaller banks For India

THIS should sound sage advice in the aftermath of the Lehman collapse. The Raghuram Rajan panel has suggested that the Reserve Bank should consider entry of smaller players into the banking sector as failure of small banks will not have systemic consequence created by failure of a giant banking entity. There is no need to believe that smaller banks would fail and historical evidence is not relevant since the situation has changed.
The panel has suggested that the regulator should prescribe tighter capital adequacy and regulatory norms for smaller banks. The Rajan committee submitted its final report on financial sector reforms to the government this week. The panel urged the regulator to “allow more entry to private wellgoverned deposittaking small finance banks offsetting their higher risk from being geographically focused by requiring higher capital adequacy norms, a strict prohibition on related party transactions, and lower allowable concentration norms”.
This means that these banks, if allowed, would be entitled to advance a lower percentage of their deposits as advances in comparison to larger banks. Such norms would minimise the risk of any of the entities going bust, the panel feels.
The committee has also questioned the honesty of the large banks, saying there is “no necessary link between size and honesty, as the recent experience with large banks suggests”. It has, however, suggested that the regulator should be more selective and find “fit and proper” criteria for giving licenses to the smaller banks.
The intent behind the need of such banks is to bring local knowledge to the bankers so that they are able to take decisions quickly in conformity with their customers whom they would personally know. The entry of such financial entities would also help in achieving the government’s goal of financial inclusion.
The committee has clarified it does not recommend smaller banks based on earlier models where governance structure was poor, political and government interference was excessive, besides unwillingness to take corrective regulatory measures.