Home / Industry / Banking /  Private banks  face government ire for missing inclusion goals

The government has warned private sector banks that it will cut business ties with them unless they enthusiastically participate in the Centre’s financial inclusion programmes, such as the Pradhan Mantri Jan Dhan Yojana (PMJDY), two people aware of the development said, a move that may potentially benefit state-run lenders.

Officials of the department of financial services have told private banks to improve their performance on the government’s financial inclusion initiatives or face sharp cuts in government business, the people said, requesting anonymity. The performance of private banks would be monitored for the next six months, and if they are still found wanting, a phased cut in government business will start, one of the two people said.

The decision follows a meeting of secretary financial services Vivek Joshi with representatives of private sector banks, small finance banks and payment banks on Tuesday to review the progress made in various financial inclusion initiatives.

Despite repeated reminders, private banks’ contribution to financial inclusion programmes remains less than 10%, and so the government cautioned them that any further slippage might result in withdrawal of government business, an official of the Indian Banks’ Association (IBA) said, requesting anonymity.

The government has deposits of over 12 trillion, making the business very lucrative for private-sector banks. These not only help banks with earnings on commissions (around 5,000 crore) but, more importantly, help banks acquire new customers and expand their low-cost CASA (current account and savings account) deposits, boosting profits.

While private sector banks’ share of total credit disbursal is now more than 40%, their participation in government-run financial inclusion schemes that seek to ensure access to financial services and credit to vulnerable groups has been lacklustre. For instance, private sector banks’ contribution to the PMJDY was only 3% until mid-last year, and their contribution to insurance schemes—Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Suraksha Bima Yojana—was 4%. For Atal Pension Yojana and Kisan Credit Card, private banks accounted for 7%.

Furthermore, an August Reserve Bank of India study found that state-run banks still have more branches in rural areas (33.4%) than private banks (20.8%). Additionally, state-run banks’ share in rural lending remains high at over 70%, while private banks only account for a small 10-15%.

“The performance of private banks on financial inclusion parameter has been poor as the banks were looking to protect whatever business they had during the pandemic. This prevented the expansion of services in rural and unbanked areas. But with banks posting healthy performance now, financial inclusion plans may get the necessary speed. The government should allow more time to private and small finance banks to expand their play on financial inclusion," said an executive at a consulting firm, asking not to be named due to his business ties with private banks.

Queries sent to the spokesperson for the finance ministry, and IBA remained unanswered till press time.

The private sector’s performance on PMJDY, which aims to provide at least one basic bank account per household, has also fallen short of government expectations. As of the end of July, over 450 million beneficiaries had Jan Dhan bank accounts, with 78% of these accounts opened by state-run banks. PMJDY accounts with private sector banks in rural and semi-urban areas stood at a mere 7 million as of July and were even lower in urban centres, at 6 million.

As of now, India has about 12 public sector banks and more than 20 private sector banks. According to RBI, all banks, including subsidiaries of foreign banks, are required to enhance the flow of bank finance to the priority sector for the overall development of rural areas.

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