Govt may share cost of no-frills accounts

Govt may share cost of no-frills accounts

Mumbai: The Union government is likely to share with banks part of the cost of operating the no-frills accounts that are integral to the effort to spread banking services across the nation.

Since most are low-value accounts, banks do not make a profit. Every no-frills account and smart card costs banks Rs200-250. The government is likely to chip in with some of this, according to bankers familiar with the development.

“The finance ministry has given indication that the government will chip in with 140 for each account," said a senior official of the Indian Banks’ Association (IBA), the national bankers’ lobby. “However, there is no written communication as yet. The government will have to make budgetary provision for it."

These accounts have nil or low minimum balances and charges, and have limited facilities. Between November 2005, when the Reserve Bank of India (RBI) directed banks to open such accounts to spread banking, and March 2010, at least 50 million no-frills accounts were opened.

A study by Skoch Development Foundation said only 11% of 25.1 million no-frills accounts opened between April 2007 and May 2009 are operational mostly because of the high costs.

The ministry officials made the commitment at a meeting with bankers last week, which came after IBA lobbied for the subsidy. Mint could not get an independent confirmation on this from the finance ministry.

The subsidy will be for opening bank accounts in villages with at least 2,000 inhabitants. Banks are required to cover all such villages by 2012. The industry is lobbying for more money for reaching out to villages with less than 2,000 inhabitants.

“We should be compensated more for reaching out to sparsely populated locations because the cost is far more than the benefit," said a senior public sector banker who did not want?to?be named.

Sameer Kochhar, CEO of Skoch, said subsidies alone weren’t enough and there should be some incentive for making profit on a per-transaction basis.

“There are certain barriers that inhibit the active operation of such accounts like the time and cost involved in reaching the nearest branch where the accounts have been opened," RBI deputy governor Usha Thorat had said in an International Monetary Fund seminar in Washington in June.

Only 5.5% of 650,000 Indian villages have bank branches and half the adults in the country, which has a total population of more than one billion, do not have access to bank accounts.

“Millions of people across the country are...denied the opportunity to harness their earning capacity and entrepreneurial talent, and are condemned to marginalization and poverty (for lack of access to banking services)," RBI governor D. Subbarao said in one of his recent speeches.

Bankers agree that the biggest challenge before them at this point is to spread banking services, but argue that the exercise should be such that it doesn’t become an obligation and a loss-making proposition.

“Inclusion is important and is a social obligation. But why only banks? The exercise won’t take off if banks continue to lose money," said another senior public sector banker, who also did not want to be named.

RBI has also been trying to push the message of financial inclusion by broad-basing the network of banking correspondents (BCs). Early this week, it allowed for-profit organizations to carry on BC activities on behalf of banks. However, experts doubt whether companies with a profit motive will be interested in going to the villages.

“Telecom companies are best suited to carry on with the BC services, but...why should they be interested in seeing financial inclusion happen unless there is some financial reward?" Skoch’s Kochhar said.