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Banks likely to get subsidy of Rs140 for each no-frills account

Banks likely to get subsidy of Rs140 for each no-frills account
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First Published: Wed, Feb 16 2011. 01 15 AM IST

Updated: Wed, Feb 16 2011. 10 25 AM IST
Mumbai/New Delhi: Banks will likely get a subsidy of Rs140 from the government for each so-called no-frills account they open, according to top bankers and finance ministry officials.
The move will make banking accessible to many of India’s unbanked and help banks meet their target of opening, by 2012, 50 million such accounts in 73,000 villages with a population of at least 2,000. The target was set by finance minister Pranab Mukherjee last year; subsequently, the Reserve Bank of India (RBI) had asked banks to submit reports on how they planned to achieve the target.
An official at the Indian Banks’ Association, a banking lobby group, said the government could give banks a subsidy of Rs140 for every account. “It may come in this budget; that’s what we have been made to understand by finance ministry officials,” added this person, who did not want to be identified.
Two finance ministry officials said that the issue was being seriously considered as recently as December. The officials couldn’t be reached this week because they have been quarantined in the run-up to the presentation of the Union budget on 28 February.
To be sure, the government doesn’t make any promises on budgetary provisions, so there’s no certainty that Rs700 crore (for 50 million no-frills accounts) will be earmarked for banks. Mint had first reported the possibility of such a subsidy on 2 October.
No-frills accounts allow customers to have zero balance, and also offer limited facilities. They are targeted at first-time customers whose banking needs are rudimentary. Between November 2005—when RBI introduced them—and March 2010, at least 50 million such accounts were opened.
Bankers say just around five million of these accounts are active, and that the low volume of transactions on some other accounts—sometimes, a mere Rs10 is transacted—makes maintaining and servicing them unviable for banks. They have repeatedly asked the government to chip in, at least with the initial cost of Rs200-300 they incur in opening an account.
While the subsidy, if it happens, will help, banks will also benefit from the Unique Identification Authority of India’s Aadhaar programme that is seeking to give every Indian a unique ID. This number is good enough to meet the know-your-customer norms of banks, thereby making opening accounts easier for the unbanked. The agency is also working with several government departments to see whether wages under the job guarantee scheme, or subsidies can be directly transferred to the bank accounts of the beneficiaries. This could ensure that more no-frills accounts remain active.
Financial inclusion remains one of the United Progressive Alliance government’s focus areas. Last week, it launched a campaign to help small farmers borrow low-cost funds from banks—a move that will prevent them from falling into the clutches of moneylenders, who lend at usurious rates. Banks have been asked to cover all unbanked areas of the country, either directly or through agents. Bankers say the task is a challenging one.
In a speech in November, RBI deputy governor K.C. Chakrabarty said that out of 600,000 villages in India, only around 50,000 have access to finance and that India has 145 million unbanked households, the highest in the world.
anup.r@livemint.com
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First Published: Wed, Feb 16 2011. 01 15 AM IST