Just as India's growing economy needs more factories, more offices, more roads, more ports, more restaurants and more salons; it needs more banks as well. The nominal or monetary size of the economy has trebled in the last decade and can further treble in the next decade. But sadly, very few new banks have been established in the last two decades of this high growth era. After a long debate, we finally have guidelines for new bank licences and this is, indeed, the right and much-needed step to finance India's economic growth plans as also its momentum in the ensuing decades.
But the idea of auctioning licences isn't appealing, and the governor of the Reserve Bank of India (RBI) rightly rejected the suggestion. We must understand that the key driver for opening up the sector to new players is to encourage new ideas, innovations and capital to enhance financial inclusion or the number of people that have access to banking services and financial products. Today, only a little over half the country's population is covered by existing banks and a much lower slice has access to most of the products, particularly credit and remittances. We have a dual banking need. On the one hand, we need big banks that can service large and growing Indian companies that are expanding globally; on the other, we need small, specialised banks with expertise to service domestic small and medium enterprises and rural requirements.
If licences are auctioned, the auction premium will be a cost deterrent for new players to achieve inclusion. It will also be a huge disadvantage to the new banks vis-à-vis incumbents and can drive the former to riskier activities to make up for the return on auction. The worst possible outcome derailing the initiative would be allegations of malpractice and the sector getting embroiled in a legal tangle just as the telecom sector now finds itself. New banks are not scarce natural resources like minerals that face the imminent risk of depletion nor are they like telecom spectrum, which can be auctioned to raise resources.
But we also believe that it is not necessary to ration or limit the number of bank licences awarded either. While there is no official directive on the exact number of bank licences to be awarded, if the market buzz is to be believed, it would be restricted to five or eight only. Limited entry to aspirants gives incumbent players an environment protected from new competitors. In a growing market, this leads to protected margins and adequate business and, therefore, little incentive for innovation and experimenting with new ideas.
Financial inclusion in India is perceived as an obligation. Most public sector banks as wel