RBI working group report on Bank Reforms – UPSC GS3

 Reserve Bank of India (RBI) released a report of its Internal Working Group (IWG) on ownership guidelines and corporate structure of Indian private-sector banks.
Recommendations of IWG :
  • Allow large corporate/industrial houses to become promoters of banks.
  • Give bank licences to Non-Banking Finance Companies (NBFCs).
  • Conversion of payment banks to small finance banks; after three years of operations.
Recent Banking reforms:
  • Reforms in Urban Cooperative Banks (UCBs): Allowed for the conversion of urban cooperative banks (UCBs) into small finance banks and the RBI was given complete control over UCBs.
  • Privatisation: of some of the smallest Public Sector Banks(PSBs).
  • Allowing takeover by foreign banks: Recently, RBI allowed DBS of Singapore to take over the ill-managed Lakshmi Vilas Bank.
Problems associated with the implementation of banking reforms:
  • Lag in implementation: E.g. A discussion paper on new banks was issued in 2010, but only two new banks were licensed under the new norms, that too in 2015.
  • Technical issues: associated with licensing more banks, allowing business houses into banking, allowing different categories of banks and putting caps on controlling stakes.
  • Cost and Quality: Whether the policies would lead to the better customer experience at a low relative cost is unknown; the process of redress is frustrating and acts against the financial consumers.
  • Governance issues in bank boards: as reported by the P J Nayak committee in 2014.
  • Lack of customer protection law for financial products: There were widespread criticisms of mis-selling of Life insurance by new private banks.
Conclusion: RBI should set up a working group to measure whether competition is driving better products and services at lower costs.
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