Financial inclusion: Govt open to foot bill initially for banks

The government is open to the idea of providing financial support to banks for implementing financial inclusion, as the lenders fear that the move may be unviable in initial years. The government, in a meeting with banks on Wednesday, expressed it was open to the idea of subvention in initial years.

The government on Wednesday met representatives of Indian banks to identify the challenges facing them for implementing financial inclusion. About 32 banks were present at the meeting, including 12 chiefs of large banks such as ICICI Bank, HDFC Bank, Union Bank of India and Bank of Baroda. R Gopalan, secretary, financial services, finance ministry, represented the government at the meeting.

The government has embarked on an ambitious plan to cover all villages having a population of more than 2,000 to have banking facilities by March 31, 2012. There are about 64,000 villages in the country with a population over 2,000 lacking a formal banking channel.

“Financial inclusion is also a priority for banks. So, the government is open to the idea of subvention in initial years,” said a source present at the meeting.

Though the government is open to provide financial assistance to banks initially, but there was also a question whether banks would share profits with the government, once their ventures turned profitable.

“There are issues of viability. As the business grows, it will become profitable. Initially, its an investment, so that’s a challenge,” said the chief of a large public sector bank.

Bankers have pointed out three major challenges on their way to implement financial inclusion. First, the establishment cost of setting up banking service in rural areas, which may not earn money for at least three years. According to rough estimates, a bank may have to spend Rs 250 per account plus 2.5 per cent of operating cost.

Second, the selection of business correspondents (BC), as they would carry the identity and trust of the bank. One large government-owned bank proposed the idea of having some kind of security from BCs, though the idea was not accepted by the Reserve Bank of India (RBI). The third concern expressed over the logistics behind replenishing cash with BCs.

The central bank is currently reviewing the plans on financial inclusion submitted by banks. RBI had asked banks to submit their board-approved plans of financial inclusion for 2010-11.

The four working groups formed to chalk out the modalities of micro automated teller machines (ATMs) also held presentations at the meeting. These four groups were given the task of chalking out technological specifications of micro ATMs, regulation, connectivity and cash handling issues.