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Budget to facilitate financial inclusion

Budget to facilitate financial inclusion
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First Published: Tue, Feb 02 2010. 12 25 AM IST

Targeting poor: Union finance minister Pranab Mukherjee. Ramesh Pathania / Mint
Targeting poor: Union finance minister Pranab Mukherjee. Ramesh Pathania / Mint
Updated: Tue, Feb 02 2010. 12 25 AM IST
Mumbai: As part of a plan to give the poor access to modern financial services, the government will earmark significant funds in the coming Union Budget to fund the creation of a common technology platform that will help banks reach out to the poorest at a low cost, according to people familiar with the matter.
Targeting poor: Union finance minister Pranab Mukherjee. Ramesh Pathania / Mint
The government is also working on two other initiatives to promote financial inclusion that will likely be announced in the Budget: a plan is being evaluated to use banks to channel more welfare payments made to the poor, thus encouraging them to open deposit accounts, and a high-profile group to drive financial inclusion across the country could be set up.
Mint could not ascertain the amount of money the government plans to set aside for the proposed technology platform.
The Reserve Bank of India (RBI) has already set banks a stiff goal: All households in villages with more than 2,000 inhabitants should have bank accounts by March 2011.
Reaching out to the unbanked—one in every two adult Indians, by some estimates—cannot be done through bank branches alone, according to experts. Technology, including the use of mobile phones, will have to be part of the answer.
In a presentation made on 18 September at a national seminar held in New Delhi and organized by the department of financial services of the finance ministry, RBI deputy governor K.C. Chakrabarty outlined some of the challenges.
He said that the traditional bank branch delivery model is “not able to cater to the needs of all” and the way forward for financial inclusion is an “ICT based delivery model”. ICT is a short form of information and communication technologies.
The need to use technology to build financial inclusion is based on the fact that transactions costs for banks and customers are high in the case of new branches and in alternatives such as business correspondents, or agents who carry out financial inclusion drives on behalf of banks. Business correspondents incur losses as banks don’t give them enough money to sustain their business in a profitable manner.
The government does not want to promote financial inclusion through subsidies and would rather use technology to drive down costs for both providers and consumers so that financial inclusion would be on a “self-sustaining model”, the people familiar with the matter said.
Bankers in private argue that they are not adequately compensated for their work in spreading financial inclusion. The Budget plans to address some of their concerns.
“A lot of debate and pockets of experiment have been going on about using technology for financial inclusion. A dedicated fund will help in investing in researching the right kind of technology that a country like India requires, keeping in mind the cost and scale factors,” said Akhilesh Tuteja, executive director, IT advisory services at consulting firm KPMG India. “A push from the government will also give an incentive to larger IT services companies to invest in financial inclusion technology.”
Currently, money distributed under the Mahatma Gandhi National Rural Employment Guarantee Scheme (NREGS), that guarantees 100 days of work for all adult job seekers in rural areas, is through banking channels. But banks don’t get any fees or commissions for distributing this money. They rely on the “float”, or the money that stays with them for 7-10 days after the sanction by the government and before the actual disbursal to the beneficiaries.
Barring Andhra Pradesh, no other state government pays commission to banks for distributing the NREGS money. In the southern state, banks get Rs2 for every Rs100 disbursed. The cost to banks for these funds are more than Rs5 for every Rs100 disbursed, according to bank officials. The government is expected to lean on other state governments to follow the Andhra Pradesh example, thus meeting a long-standing demand of the banking sector.
Active involvement of state governments can settle the issue and the Budget will outline states’ role, a senior finance ministry official said on condition of anonymity.
The cost to the government for disbursing development funds to the rural masses is Rs7 for every Rs100 disbursed, but the funds often do not reach the beneficiary.
The banking channel is used only in case of NREGS and certain public works department projects. Most of the government’s welfare schemes could be disbursed through the banking channels in the future, and some of these are likely to be introduced in this Budget.
With the increase in allocation and inclusion of other funds using the banking distribution channel, the government wants to compensate banks for sustaining the projects.
Lison Joseph contributed to this story.
anup.r@livemint.com
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First Published: Tue, Feb 02 2010. 12 25 AM IST