Why India Needs More Banks: Competition Drives Innovation and Better Customer Service

India’s banking sector is undergoing a transformative phase, marked by rapid digitalization, improved asset quality, and growing financial inclusion. However, to sustain this momentum and meet the evolving needs of a diverse population, issuing more bank licenses and fostering competition through modern regulatory frameworks is critical. Here’s why:

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1. Competition Spurs Innovation and Efficiency

The entry of new banks, particularly digital-first and niche players, forces existing institutions to innovate. For instance, the rise of Unified Payments Interface (UPI)—which processed over 10 billion transactions monthly by 2023—was accelerated by competition between traditional banks and fintechs . New entrants like Small Finance Banks (SFBs) and Payments Banks have already driven innovations in rural banking and microcredit, reducing turnaround times and operational costs .

Statistical Insight:

- India’s fintech industry is projected to grow from $111 billion in 2024 to $421 billion by 2029 .

- Banks adopting AI and machine learning for fraud detection and credit scoring have reduced operational costs by 20-30% .

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2. Addressing the Untapped Market

Despite progress, 190 million Indians remain unbanked . New banks, especially those targeting rural and semi-urban areas, can bridge this gap. For example, the RBI’s Digital Kisan Credit Card (KCC) initiative aims to digitize agricultural loans, but its success hinges on partnerships with agile, tech-driven banks .

Case Study:

- AU Small Finance Bank and Fino Payments Bank—recent applicants for universal licenses—have demonstrated success in serving underserved segments, with AU’s rural loan portfolio growing by 18% YoY in 2024 .

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3. Improved Asset Quality and Risk Management

Competition encourages stricter risk management. In 2024, the gross NPA ratio for Indian banks fell to 2.7%, a 13-year low, driven by proactive measures from both public and private banks . New banks, subject to modern regulatory frameworks like the RBI’s Expected Credit Loss (ECL) guidelines (effective April 2025), will further strengthen systemic resilience .

Data-Driven Argument:

- The gap in NPA ratios between public and private banks narrowed from 967 basis points in 2018 to 127 in 2024, reflecting healthier competition .

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4. Customer-Centric Services Through Technology

Hyper-personalization is no longer optional. With 83% of Indian consumers prioritizing digital banking convenience, new banks leveraging Generative AI (GenAI) and open banking APIs are redefining customer experiences . For example:

- Chatbots now resolve 70% of routine queries in regional languages.

- Buy Now Pay Later (BNPL) services, enabled by open banking, are projected to serve 30 million online users by 2026 .

Regulatory Support:

- The RBI’s Account Aggregator (AA) framework allows secure data sharing, enabling tailored financial products .

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5. Strengthening Financial Inclusion and Economic Growth

More banks mean better access. The RBI’s new Standing External Advisory Committee (SEAC) aims to fast-track licenses for institutions committed to financial inclusion, such as Annapurna Finance and VFS Capital . This aligns with India’s goal to become a $7 trillion economy by 2030, where banking sector growth is pivotal .

Key Metrics:

- Digital payments in India are expected to constitute 65% of all transactions by 2026 .

- The Banking-as-a-Service (BaaS) market is projected to grow at a 13.2% CAGR through 2030, driven by partnerships between banks and fintechs .

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Conclusion: The Path Forward

Issuing more licenses isn’t about diluting the market—it’s about fostering a dynamic ecosystem where competition drives efficiency, inclusivity, and innovation. The RBI’s proactive steps, from revamping licensing committees to implementing AI-friendly regulations, signal readiness for this shift. As India’s middle class expands and digital adoption soars, a diversified banking sector will ensure that no customer is left behind.

References: RBI reports , IBEF , Capco , and Fortune India .

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