NEWS WIRE: India: Committee on Financial Inclusion Recommends Floor on Annual Number of New Accounts to Increase Access to Services in Rural Areas

Original article available here.

MUMBAI, February 6 – Give banks a compulsory target of adding 250 new accounts per branch per year. That is the recommendation to increase penetration of financial services in rural and semi-urban areas, from a special committee headed by Dr. C. Rangarajan.

“Semi-urban and rural branches of commercial banks and RRBs (Regional Rural Banks) may set for themselves a minimum target of covering 250 new cultivator and non-cultivator households per branch per annum, with an emphasis on financing marginal farmers and poor non-cultivator households,” the committee headed by the economic advisor to the prime minister and former said.

“Commercial banks have an important role. There are some districts where the population per branch is higher than the national average and they will require pointed attention,” Rangarajan, a former RBI governor, said.

Data reveals that 45.9 million farmer households in the country (51.4%), out of a total of 89.3 million, do not have access to credit, either from institutional or non-institutional sources. Further, despite the vast network of bank branches, only 27% of total farm households are indebted to formal sources (of which one-third also borrow from informal sources), the report said.

The North-Eastern region has the highest number of people (95.91%) not accessing credit from formal sources as a proportion to total farm households, followed by the Eastern (81.26%) and Central region (77.59%) respectively.

The committee has recommended that a National Rural Financial Inclusion Plan (NRFIP) may be launched with a clear target to provide access to comprehensive financial services, including credit.

The target is to reach at least 50% or 55.77 million of financially excluded households, by 2012 through rural/semi-urban branches of commercial and regional rural banks with full inclusion have to be covered by 2015, the committee said.

“We really want banking to go to the villagers rather than villagers coming to branches, and RRBs play a critical role. Post merger these banks are profitable accounting for 37% of rural banking offices, 31% of deposit accounts and 37% of loan accounts,” Rangarajan said.

There are 96 RRBs currently, down from 196 earlier, following an amalgamations to strengthen the sector.

However, some RRBs are facing a shortage of capital. Hence, the committee has recommended “recapitalisation of RRBs with negative net worth and widening of their network to cover all unbanked villages in the districts where they are operating.”

Calculations suggest that there are 27 RRBs which require capital of about INR 1,900 crore (USD 480 million) and 50% of this capital will be provided by the government and the other half shared by the states and banks sponsoring the RRBs.

Interestingly, the committee didn’t look to keen to enlist money lenders as correspondents. The suggestion to enlist money lenders as a means for financial inclusion was made by a RBI technical group in July last year.

However, deputy RBI governor Usha Thorat, who is also a part of the committee, said state governments have been examining the RBI proposal. The other members on the financial inclusion committee are former Nabard chairman Dr. Y. S. P. Thorat, current Nabard chairman Umesh Chandra Sarangi, and Dr. K. G. Karmakar, managing director, Nabard.

The report is available here.

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