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MFIs and banks to meet finance ministry offcials ahead of Modi's new financial inclusion plan

It is expected that Modi will announce plans to open 75 million new bank accounts over the next one year on the Independence Day

Namrata Acharya  |  Kolkata 

Ahead of Prime Minister Narendra Modi's announcement to roll-out a new financial inclusion programme on August 15, the Union ministry of finance has convened a meeting with banks and non banking finance companies on August 11, to discuss the plan.

It is expected that Modi will announce plans to open 75 million new bank accounts over the next one year on the Independence Day.

Microfinance institutions (MFIs), through a reach of nearly 30 million rural borrowers, are expected to play a significant role in government's plans, particularly with RBI recently relaxing norms on business correspondents banking model.

However MFIs, which have been working with banks through their not-profit wing so far, have been facing operational difficulties in doing business with banks-an issue which MFIs are likely to raise in the meeting.

According to survey by microfinance institution network (MFIN), published in February this year, nine out of 14 MFIs closed their operation as BCs in the recent past. According to the MFIN survey, of the 14 MFIs that had formerly been business correspondents with banks, four were profit-making; nine were loss-making, while only one achieved break-even in their BC operations. The MFIs cited lack of support from banks as the key reason to stop the operations.

This apart, according to the survey, business correspondent model was not suitable for small MFIs due to low revenues and high operational costs, said the survey. Also, a few MFIs perceived banks as competitors who may poach the good clients of the MFI once they are linked through the BC channel, the report said.

The two key issues with MFIs are regarding the remuneration and the reluctance of banks to open the basic savings account for borrowers.

"The model did not work with MFIs. We will now see, how can MFIs work outside the BC arrangement as agents for banks," said Samit Ghosh, president MFIN and founder of Ujjivan.

Several MFIs have already started experimenting with new models to work with banks.

For example, Janalakshmi Financial Services, which used to serve as BC of Axis Bank, put its alliance on hold. Instead, it has now tied-up with DCB (Development Credit Bank) to launch a co-branded prepaid card for disbursal of small loans by Janalakshmi Microfinance. The product is administered in association with Jana Urban Foundation.

"It was a very amicable arrangement with Axis Bank, but our priorities changed, so we stopped. At the moment the plan is on hold. Now, we have tied-up with DCB for prepaid cards, " said V S Radhakrishnan, managing director and CEO of Janalakshmi.

To facilitate financial inclusion, about two months back, the Reserve Bank of India allowed non-banking finance companies, which do not accept deposits, to become business correspondents for banks.

First Published: Sat, August 09 2014. 17:18 IST
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