The Reserve Bank of India has decided to open up its banking system, and invited state-owned and privately-held companies to file applications for licences to run banks in the country. Successful applicants will need to be financially sound and have a successful track record for 10 years, meaning companies will already need to operate in another sector to get a licence.
There is another caveat: new banks will have to set up at least 25% of their branches in rural India.
That is a smart move, opening up the system while also dealing with one of the countrys big problems the fact that so few rural citizens have bank accounts.
It is not just good for the socially conscious. Tapping into rural lending can offer eye-popping returns to new and old banks alike, and could prove a big source of growth.
But these banks may want to share the spoils, especially if rural borrowing demand proves ravenous enough for capital concerns to become a real problem. Now is surely a good time for Indian regulators to rethink their long aversion to securitisation, which, if used carefully, could be the perfect accompaniment to its latest measure.
Securitisation would not only allow banks to lighten up their balance sheets not just of rural but also of corporate loans but it would also give local investors a way to boost their returns.
The regulators might respond that theyve seen the impact of all this before and that these old arguments did not help prop up markets in the credit crunch. But they should blame the players, not the game.
Unfettered securitisation is clearly a problem. Lenders should be forced to do extensive credit checks before lending, and banks should have some skin in the game. But as long as there is a good system of checks and balances in place, and as long as the government makes clear it will punish abuses, securitisation can be a real addition to Indias financial market.
The Indian government is certainly not leaving the rural population in the dark, and the central bank should be congratulated for its latest move. But it is time for regulators to go one step further and allow securitisation to help the banks, the investors and the rural citizens.