RBI mulls allowing banks to decide on branches

The Reserve Bank of India (RBI) may de-license or leave it to banks to open branches in rural and semi-urban centres, in a step towards liberalising its branch authorisation policy.

If that happens, it will no longer be compulsory for a bank to open branches in rural and semi urban centres to bolster its application to get a licence to open more branches in urban or high-income areas.

However, the bank will be required to mention its priorities and preferences in the annual business plan it presents to RBI. But, the revised policy is likely to control the number of branches to be opened by a bank in urban centres. This number will be linked to the bank''s overall performance in all centres, usage of existing licences and also meeting its rural and semi-urban credit obligations.

Sources made it clear that while a bank need not open a branch to enter rural banking, it will still be required to meet its rural and semi-urban credit obligations. Else, there would be concentration of bank credit in urban centres, which poses a system risk. In semi-urban centres, a major criterion will be the flow of credit to small and medium sector enterprises.

Here, sources said, comes the role of the business correspondent or business facilitator model which banks were permitted to use for banking in unbanked rural and semi-urban areas, as given in the guidelines on Financial Inclusion by Extension of Banking Services through use of Business Facilitators and Business Correspondents (BCs). Banks are permitted to use the services of NGOs/MFIs set up as societies, trusts, non-profit companies, post offices, cooperative societies and, more recently, retired bank employees, ex-servicemen and retired government employees as BCs for rural banking.

The current branch authorisation or branch licensing policy of RBI outlines the norms for banks to follow while opening/ upgrading new branches and extension counters, automated teller machines and shifting/splitting/closure of branches.

Currently, a bank is required to take permission to open branches anywhere. Besides, as an informal code, RBI maintains a ratio of urban centre branches to rural/semi-urban ones. This means a single branch in an urban area will require a certain number of branches to be opened in rural and semi-urban areas.

Sources explained that the proposed change forms a part of the recommendations made by the Raghuram Rajan committee on financial sector reforms, towards broadening access to finance.

The Rajan panel said RBI should de-licence the process of bank branching immediately, while retaining the right to impose restrictions on growth of certain banks for prudential concerns, such as excessive exposure to certain sectors, involvement in frauds, etc.

RBI has already accepted another committee''s recommendations, by freeing banks to establish ATMs without taking its prior permission.

However, RBI is not in favour of the Rajan committee suggestion on a certificate exchange programme for banks to address the rural credit obligation.

The recommendation stated that small banks and co-operatives should acquire certificates from RBI/ government for any excess number of accounts opened in rural and semi urban areas and sell these to deficient banks.