New Delhi: The finance ministry has asked the states to electronically transfer salaries to employees and payments to beneficiaries of welfare schemes, in an effort aimed at reducing transaction costs, ensuring that the money reaches the people it is meant for (in the case of welfare programmes), and utilizing accounts opened by customers in rural areas that otherwise do not see too much activity.

Currently, each state, and each department within the state, could be using a different mode of payment. Finance minister Pranab Mukherjee, bankers and the chief ministers of some states discussed the issue at a meeting last month.

Farmers looking at a list displayed outside a rural branch of SBI. Photo: Mint

Only 5% of the 600,000 villages, towns and cities in India have a bank branch, and only 40% of the country’s population has access to a bank account, according to the Reserve Bank of India (RBI). As part of its financial inclusion (providing banking and other financial services to the unbanked) road map, RBI has asked banks to cover 73,000 villages with population of at least 2,000 by the end of this fiscal. The ensuing action by banks has resulted in several million new accounts being opened, but many of these see no action. The finance ministry’s plan could address that issue, too.

“Banks are using significant resources to open accounts in far-flung areas using banking correspondents. We are noticing that a large number of such accounts do not have any transactions. What is the use of these accounts if there are not being used?" the finance ministry official said. “Now, the link between the beneficiary and the bank has been established. It’s now a question of only linking the government department and the banks."

A banker familiar with the ministry’s plan said the move would also increase efficiency.

“Government departments will have to make a list of the beneficiaries, the names of their banks and their account numbers, and pass this on to the banks. Once this list is made, the government departments will have to just issue an advisory to banks every time they want to release payments to the beneficiaries," said an executive director at a state-owned bank, who did not want to be identified. “The whole collection of data is a one-time exercise. This will save a lot of time and effort."