Banks for Builders, Safety for Savers

The idea

Picture two young founders in Bengaluru with a better way to lend to small shops. They meet the capital rule, pass RBI's security test and apply on a Monday. Thirty days later they hold a licence, or a clear letter saying exactly what to fix. Within a year their agents are opening accounts in villages across three states.

Picture a retired teacher in Nashik whose savings sat in a small cooperative bank. One morning she gets a message: her bank has joined a larger, well-run bank, every rupee of her deposit is safe, and her passbook now works at more branches than before. Her neighbour, a farmer, keeps his full credit limit and the same local agent he has always trusted.

I believe banking should be open to anyone with the capital and the skill to serve customers well, and the state's energy should go into protecting your money. That means a few firm rules wherever savings are held, freedom everywhere else, and fast, heavy penalties for anyone who breaks trust.

We have seen what open rails did for payments. UPI let any certified bank or app compete on open rails, and Indians got a payment system they use every day. Banking can open up the same way, with savers safer than ever.

Why now

Savers deserve stronger banks. Cooperative banks hold ₹13.67 lakh crore of deposits, spread across 1,842 banks, many of them small and fragile.

Moving those savings onto firmer ground pays off. Cutting cooperative bad loans from about 7.5% to 3% would avoid about ₹44,000 crore of bad loans (estimate).

Talent is waiting at the door. Fino Payments Bank won in-principle approval to become a small finance bank about 8 years after it launched. A 30-day answer lets that energy go into serving customers.

America, our benchmark for capitalism, shows that a fast, open door is normal. Its national bank regulator aims to decide every complete charter application within 120 days. Our 30-day clock sets India's bar four times faster, and we publish every decision time beside the American one.

And new banks create work where it is needed most. Digital bank agent networks can add about 2 lakh jobs in rural India (estimate), one agent for every three villages.

The big moves

Here is one clear path, step by step. The details belong to RBI, the industry and the people who will run it.

1. First, open the door to new digital banks. RBI publishes a simple licence for a Digital Innovation Bank, with one safety bar for anyone holding public money, such as a fixed net-worth floor, fit-and-proper promoters and a published security test. Every complete application gets a licence or written reasons within 30 days. A licensed bank can take deposits, lend and run payments, digitally and through agents.

2. Next, put firm rules where your money sits, and freedom everywhere else. Anyone holding deposits or wallet balances meets three hard rules: capital, KYC and a daily data feed to RBI. Payment apps, lending marketplaces and wealth tools that leave balances with a bank may do anything outside a short public list of banned practices. KYC is checked once, through each person's KYC credential (Chapter 4).

3. Then, fold every weak cooperative bank into a stronger one. Each cooperative bank has a year either to meet small-finance-bank standards or to join a digital bank, a small finance bank or a commercial bank. RBI's existing amalgamation power completes the rest. Village credit societies stay on as local agents, so members keep the faces they know.

4. Alongside, enforce swiftly after the fact. Heavy penalties replace slow approvals, for example fines linked to the gain or to turnover, and a lifetime ban for a promoter found to have committed fraud. A dedicated enforcement wing decides within weeks, with appeals to the Securities Appellate Tribunal.

5. Finally, price safety fairly and let good banks grow. Every deposit-taker pays deposit insurance priced by its own risk, on one published scale. Banks and apps may grow as large as their customers make them, and the Competition Commission polices conduct such as predatory pricing. This is America's rule for competition: a large share won by serving customers is lawful, and only unfair methods are punished.

Today vs the new way

Here is how banking compares for founders, savers and borrowers.

The new way opens the door to builders, puts savings on firmer ground and keeps rural credit flowing, with the same insurance fund standing behind every saver.

Proof it works

A cooperative bank became a modern bank. Shivalik Mercantile Co-operative Bank converted into Shivalik Small Finance Bank in 2021, the first under RBI's voluntary scheme for urban cooperative banks.

We have rescued savers through a merger. After the PMC Bank fraud, RBI used its section 45 amalgamation power to merge PMC into Unity Small Finance Bank in 2022, protecting depositors.

America publishes the bar and the clock. The US Office of the Comptroller of the Currency publishes its charter rules and aims to decide every complete application within 120 days. Founders know what to meet and when to expect an answer before they apply, which is exactly the confidence a 30-day licence gives Indian builders.

Digital banks thrive in Asia. Singapore's central bank awarded digital bank licences in 2020. South Korea's KakaoBank, licensed in 2017 as a branchless bank, gained millions of customers in its first year.

What success looks like

• In the first 30 days: the licence criteria and the banned list are published, the penalties law is tabled, and every bank sends RBI a daily data feed.
• Within 1 year: the first digital bank licences are issued, and these banks open accounts for at least 5 crore previously unbanked or dormant users (Chapter 2).
• Within 1 year: every cooperative bank is converted, merged or wound up, with every insured depositor paid within 90 days.
• Within 1 year: every licence decision time is published each quarter beside America's 120-day benchmark, so the gap, if any, is visible to all.
• After year 1: the banned list is reviewed every year, and enforcement results are published for everyone to see.

Guardrail ideas

Ideas to start the conversation, for the builders, experts and the public to shape together.

• Every saver is protected through every change. An acquirer takes on every deposit, insured or uninsured, from the day a merger is signed, and capital and bad-loan reports stay confidential with RBI until then.
• Rural credit keeps flowing. Acquirers keep every current borrower's credit limit for 12 months, and every block keeps at least one banking point.
• Members receive fair value. Members' share capital is valued independently and paid in cash or acquirer shares within 90 days.
• Growth is earned, conduct is policed. As in American competition law, a bank or app may win any share by serving customers better, and the Competition Commission acts swiftly on unfair methods such as predatory pricing, tying or refusing to connect a rival.
• Payment rails stay in Indian hands. Foreign holdings above 50% follow Chapter 10, with India's payment rails under Indian control.

FAQs

Q: Does dropping approval in advance invite the next bank failure?

A: It makes your savings safer, because supervision focuses where the money is. It is a fair question, given what happened at PMC. Anyone holding public money still meets firm capital, KYC and daily data rules, pays insurance priced by its own risk and holds 15% capital. The lighter rules apply only to activities that leave public money with a bank.

Q: Will rural members lose local credit when district banks merge?

A: They gain a stronger bank and keep their local service. Village credit societies stay on as agents, every current borrower keeps the full credit limit for 12 months, and every block keeps a banking point.

Q: Will the bank transaction tax make loans dearer?

A: Borrowing stays affordable. Loan principal paid out or repaid through any RBI-regulated lender pays the low 0.25% supply-chain rate (Chapter 1).

The detailed blueprint for this chapter, a starting draft for the mission heads, industry and the private sector to refine, is in the Implementation Annex.