FE@CAMPUS MASTERMIND: Response by Rajshekhar Dalmia to question for Jan 28-Feb 3
Broadening and deepening the reach of banks is required to achieve a truly inclusive economic growth. Such access is especially powerful for the low-income segment of the society as it provides them opportunities to build savings, make investments, avail credit, and to develop immunity towards income shocks and emergencies. A majority of people who come from underprivileged sections of the society have still no access to formal banking services. An increase in the number of banks would foster greater competition, thereby reduce costs and improve the quality of services. More importantly, it would promote financial inclusion and ultimately support inclusive economic growth. Banks will have to lower their interest rates on loans to attract borrowers and interest rates on deposits will be raised so as to attract more depositors which will provide an incentive to save more. Competition would also demand a lot of innovation for the mere survival of many players in the market.
Allowing entry to more private well-governed deposit-taking small finance banks with stipulation of higher capital adequacy norms, a strict prohibition on related party transactions, and lower allowable concentration norms would also increase financial inclusion by reaching out to poorer households and small and medium enterprises. The main objective should be to achieve a wider spread of bank credit and then directing a larger volume of credit flow to priority sectors, hence making it a more effective instrument for economic development.