Merits and Challenges of Differentiated Banks in India

Merits and Challenges of Differentiated Banks in India

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Differentiated Banks are institutions of Banking authorized by RBI to give particular banking products and sevices. Differentiated banks operate in a subset of the market, making them distinct from universal banks. Promoting financial inclusion and payments is one of the primary goals of distinct banks.

Advantages of Differentiated Banks in India

• Financial Inclusion - Small Finance Banks, India, Post Payment Banks, Local Area Banks, Payment Banks, Wholesale Banking, and the Regional Rural Banks Small finance and payment banks, for example, have been successful in achieving their stated goal of increasing financial inclusion.

• Asset expansion - According to the study conducted by the RBI, the assets of small finance banks have increased by 150 percent annually between the financial years 2017-18 and 2019-20.

• Increased Deposits - The number of deposits held by small finance banks has also significantly increased. These banks' credit management is being improved as a result of this increased deposit.

• Increase in Expansion - The last-mile connectivity has been maintained by a significant increase in the number of Payment Bank and small finance Bank branches.

• Reduced transaction costs - may result from increased competition among banks.

• Conflicts of interest were reduced - Where differentiated licenses are issued, conflicts of interest would not arise when a bank performs multiple functions.

Challenges faced by differentiated banks

• Managing public perception - Building trust in the minds of depositors is one of the most significant obstacles that differentiated banks must overcome. In addition, it is challenging to instill enough confidence in the general public to encourage them to make deposits in distinct banks in light of the country's ever-increasing number of commercial banks.

• Mismatches in Asset Liability - Asset-liability mismatches are a possibility for sector-specific banks. It is one of the primary reasons that the RRBs merged..

• Cross-subsidization is absent - Cross-subsidizing is how universal banks operate, which means that businesses that generate losses in one segment are offset by businesses that generate profits in another. This is impossible for specialized banks because they are required to operate exclusively in predetermined markets. It eventually has an effect on their revenue.

• Danger of concentration - The differentiated banks will be vulnerable to concentration risk, and a downturn in a specific industry or region could threaten a bank's operations.

• Making development obligations more competitive - When banks are required to contribute to the government's priority sector obligations and other welfare measures, the introduction of differentiated banks eliminates the level playing field that is currently available to all banks.