The Indian Commercial Banking System in the Next Decade - The Role of Small Banks

By Dr. S. S. Tarapore

Summary

This Forum of Free Enterprise booklet reproduces a commemorative lecture by Dr. S. S. Tarapore, former Deputy Governor of the Reserve Bank of India, delivered at the Karur Vysya Bank’s Founder’s Day celebration in Mumbai on 21 September 2010. Tarapore offers a forward look at the Indian commercial banking system over the coming decade, projecting a roughly five-fold growth in bank deposits between 2010 and 2020 and some 400 million new entrants to the banking system, and arguing that this expansion will require a fusion of modern technology with sound banking practice rather than mere novelty for its own sake.

Across the lecture he works through a connected set of policy issues: risk management and the danger of under-skilled risk-takers; the unequal regulatory treatment of banks versus non-banks; a sustainable, market-aligned approach to interest-rate fixation; the case for an empowered deposit-insurance authority that genuinely represents depositors; and the long-overdue deregulation of the savings-bank interest rate, which he criticises as a frozen relic of policy. He champions depositors’ rights, recalling the late M. R. Pai’s insistence that banks ‘live on the ignorance of depositors,’ and presses for stronger consumer service for the common bank customer.

Tarapore also addresses financial inclusion and financial literacy, the future of public-sector banks (favouring selective recapitalisation of stronger banks over uniform support), the entry of new private banks, and his scepticism about allowing industrial and business houses to promote banks. A distinct section makes the case for well-run small banks in the next decade, arguing they hold a niche advantage in serving local clientele and that the post-crisis ‘too big to fail / too big to save’ dilemma strengthens the argument for organic, appropriately scaled banking. The booklet closes with a memorial tribute to the chartered accountant Shailesh Kapadia and standard Forum membership matter.

Key points

• Projects roughly five-fold growth in bank deposits (Rs 449 lakh crore to Rs 2,335 lakh crore) and ~400 million new banking users between 2010 and 2020.

• Argues bank expansion needs a fusion of technology and sound banking, with risk management as the most under-addressed challenge.

• Criticises unequal regulatory treatment of banks versus non-banks and urges a sustainable, market-aligned approach to interest-rate fixation.

• Calls for an empowered deposit-insurance authority and champions depositors’ rights over borrowers’.

• Presses for deregulation of the savings-bank interest rate, calling current policy a frozen relic.

• Backs selective recapitalisation of stronger public-sector banks and is sceptical of industrial houses promoting banks.

• Makes the case for well-run small banks as having a niche advantage and warns against the ‘too big to fail / too big to save’ trap.

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