Banks need to be able to see financial inclusion as a business opportunity.

The Government’s Financial Inclusion Plan (FIP) for providing banking facilities to all six lakh villages in the country has its share of critics. Since its launch two years ago, the primary argument against the FIP has been that compulsory rural operations are a drag on the profitability of banks.

This could be the reason why Indian commercial banks missed out on their self-set targets for providing banking facilities in all villages with a population above 2,000 by March 2012. Against 74,414 villages identified and allotted among all the banks for coverage, as of March 2012, outlets were opened to cover 74,199 villages.

The primary argument against the FIP in its present form has been that merely providing every household with a bank account does not qualify as financial inclusion. Many of these accounts remain inactive, as villagers are either unconvinced of the merits of parking their monies in banks or simply don’t have the funds.

Banking on hope

For the banks, unless the account has a minimum balance of Rs 2,500 and there is a 4-5 per cent spread, there is no way to break even.

The SBI itself has more than 40 lakh no-frills accounts, where the average balance is around Rs 150-170 and bank officials have gone on record to state that they are unlikely to make profits under the model.

However, there is hope on the horizon: The government plans to directly credit the payment of Rs 33,000 crore under the National Rural Employment Guarantee Scheme, besides various subsidies, to the accounts of beneficiaries. If this occurs, the balances in the accounts are likely to increase into four-digit figures, though it might still not be the ideal Rs 2,500 for the next five years.

What is more, there is likely to be sizeable demand for loans from the rural population. As per a study by the Department of Economic Research and Analysis and the National Bank for Agriculture and Rural Development (NABARD), the average loan size of these households was Rs 36,650 in 2006 and considering a scenario where loan accounts are provided to 90 per cent of 1,405.52 lakh rural households (assuming 10 per cent of the population does not want any loan account), the additional loan amount required works out to Rs 455,640 crore.

In the country, the weighted average net profit on loans advanced by the institutional sources works out to 2.636 per cent. As such, the expected net profit for banks from the operation of additional loans would be Rs 12,010 crore.

Critics of the FIP would also do well to note that while the banks may not make an immediate profit from the social exercise, there is likely to be a huge benefit to the target population of these schemes in the long-term.

This will provide ample opportunity to the lenders to also recoup their investments on the scheme and record a profit.

The beneficiaries

Rural borrowers that relied on non-institutional lenders will be the biggest beneficiaries of financial inclusion, as they will garner better interest rates than those offered by money lenders, with the reduction in interest costs after moving to institutional loans estimated at Rs 18,126 crore per annum. Most importantly, banks need to be able to see financial inclusion as a business opportunity. Technology has a vital role to play, as brick and mortar branches would not be cost-effective, which is why the banking correspondent model is key. It is now up to the banks to discover the business and delivery model that works best.

While adequate infrastructure such as digital and physical connectivity will boost the financial inclusion initiative, there is also a need to boost demand for these services. For this, it is necessary to generate awareness and adopt a national strategy, incorporating course material on the benefits of banks and their operation in the curriculum of schools, nationwide.

arvind.jayaram@thehindu.co.in

(This article was published on June 23, 2012)
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