Banks' fin inclusion efforts to be reviewed

The government will review the execution of financial inclusion plans (FIP) by banks at a meeting here on December 15.

The Reserve Bank of India (RBI) has asked banks to extend services to villages with a population of over 2,000 persons by March 2012. Most banks are in the early phase of execution and are stumbling on problems in coordination and administration, a senior public sector bank official said.

Barriers to the access of financial services are on both the demand and the supply side. Limited literacy, with even lower financial literacy, is a major hindrance in achieving financial inclusion. Many general financial products are unsuitable for the poor and there is not much effort to design products that are suitable to their needs.

The finance ministry will take stock of the progress made in the implementation and discuss the issue of overlapping areas across banks for FIP and Electronic Benefit Transfer at the meeting. The focus will be on conducting a status check for its rollout in 73,000 identified habitations. Senior officers of the banks will also dwell on covering 600,000 villages for the national rural employment guarantee scheme.

The initial experience with inclusion plans indicates that a lack of awareness about financial services and products makes the task of intermediaries even more difficult. With no well-established banking relationships, the unbanked poor are pushed towards expensive alternatives.

Seen from the service providers’ angle, the high customer acquisition and transaction costs deter financial intermediaries from serving the unbanked areas. Banks do not find it cost-effective to serve poor customers because of the low business volumes, at least in the initial stages.

The lack of basic physical and social infrastructure, including roads and communication, increases the cost of servicing the unbanked areas. It also places an obligation upon the banks to provide a supporting environment to make people bankable.