Lab Experiment

This refers to Expert Opinion - LAB Experiment by Ramesh Krishnan (April 17). I wish to state the following in this regard:

The equity capital of most RRBs is Rs 1 crore and therefore the minimum stipulated capital of Rs 5 crore for LAB seems sufficient to mobilise resources of Rs 60 crore. Incremental capital is not a problem since only serious private enterprises will promote LAB.

The success of LAB will hinge on high-yielding assets which bear high risk. Here are the bare facts:

LABs will have the benefit of only 3 per cent CRR compared to 10 per cent for other banks.

 

LABs interest rates will be free on deposits and lending. This aggressive marketing muscle was never used by the RRBs as it would have hurt the parent nationalised banks low interest structure.

The average cost of funds of the RRBs in UP is less than 8.5 per cent. Even if we consider the prevailing PLR of 14 per cent, brought down by the slack season credit policy, the spread is still very comfortable at 5.5 per cent. The recently announced credit policy will be a boon to LAB as it will free the limit of investment in corporate debentures and bonds. Such investment will be deemed as credit. This will take care of NPA.

Product differentiation is of little consequence as RBI is not allowing LAB to be extended to bigger towns. How many of the rural and semi-urban existing branches have ever offered product like high yielding flexi deposits? LAB will definitely wean away clientele from traditional banks.

The well-defined area of operation of three contagious districts is to be viewed as the USP for LAB. This operation will help in economic development of the defined area as resource mobilisation and deployment will be in same terrain as compared to the practice of nationalised banks.

LAB should be viewed as mini version of the newly set up private sector banks. The delay in sanctioning licenses for LAB may provide a breather to banks, but they are not likely to succeed in combating the forthcoming onslaught.