Answer:

In last two decades, the reach and scope of banking has increased, but the huge demand for financial services remains unfulfilled. It is a matter of concern that even with 150 domestic commercial and over 2,700 co-operative sector banks operating in the country, just about 40 per cent of the adults have formal bank accounts.

Thus, even while the efforts to ensure financial Inclusion through the existing set of banks continue, the concept of differentiated bank has been introduced. Differentiated banks are distinct from universal banks as they function in a niche segment. It could address the abysmal levels of financial inclusion in following ways-

♤ Commercial banks are largely interested in funding large and medium corporations or giving out loans for home and vehicle purchases and have neglected smaller segments. Differentiated banking models like payment bank and small bank can fulfil the gaps.

♤ Differentiated banks will allow customers to directly take deposits, which will bring down their cost of funds and translate into lower interest rates for clients.

♤ These banks may be in a better position to exploit the huge business opportunity in funding small and medium enterprises.

♤ Also the RBI expects them to be high technology-low cost operators, while also will bring innovations in service delivery.

Some issues which could impede functioning of these banks-

♤ Many niche-banking models typically depend on inter-bank liquidity, and wholesale funding which is a potential source of risk and vulnerability and maintaining systematic stability and protecting the interest of depositors.

♤ Full penetration of no-frills accounts may prove to be a constraint in their pursuit of deposit accounts.

♤ Differentiated banks will have to persuade a large number of potential customers to either switch from commercial banks or open up a second account.

♤ Beyond this, on the loan side of the business, as they seek to grow their lending volumes, they will be in direct competition with the priority sector mandates of commercial banks

For these new categories to be given a fair chance of success there is a need for some re-alignment of roles and responsibilities between different categories of banks in relation to no-frills accounts and priority sector loans.