By competition not hobbling by fiat

By competition not hobbling by fiat

Foreign and private banks are right to be miffed with an RBI rule that will kick in on September 1and would restrict them from opening current accounts, ostensibly to prevent borrowers from diverting funds. The rule bars a bank that has less than 10% of an enterprise’s approved credit facility from opening a current account for it. The idea would appear to be to prevent foreign and private banks from creaming off fee-based activity, leaving stodgy public sector banks (PSBs) to do the lending that often turns sour. However, this solution tilts the playing field in banking and creates unequal competition.

Current accounts lower the cost of funds for banks. And it does seem unfair to let private and foreign banks corner this bit of the business. However, the solution lies in PSBs raising their game, and the government fashioning a control regime that allows PSBs to be nifty on the ground.

The administrative hobbling of competition from the private sector will deprive customers of choice in banking and reduce the ease of doing business. India would look a bit like China in setting up obstacles for companies the State does not favour. That is not the reputation India wants in a rules-based global order that India needs to maximise its tapping of globalisation’s growth potential.

The regulator reckons that the current checks on the use of multiple operating accounts by borrowers are inadequate — scams at PNB is proof — and the new rules will strengthen credit discipline. Instead, technology can be put to effective use to minimise diversion. An algorithm trained to identify the patterns on funds moving in and out of current accounts can do the job. Foreign banks should also ensure that there is proper disclosure and transparency of funds moving in and out of current accounts.