Tuesday, January 22, 2013

Indian government pushes banks to go rural, but will it pay?

New Delhi plans to directly transfer cash payments for subsidies into these accounts, a move aimed at tackling graft in India's creaky, corruption-ridden public distribution system.

If successful, the initiative could also bring modern banking to the doorstep of rural India, a goal towards which progress has so far been fitful despite mandatory targets set by the government and Reserve Bank of India.
The target is a tough one in a country where only 35 percent of people had formal bank accounts, versus the global average of 50 percent, according to a financial inclusion survey by World Bank in 2011. Nearly two-thirds of India's 1.2 billion population still live in rural areas.
Currently being piloted in 20 districts, including three in Rajasthan, the programme is expected to go nationwide in phases over the next year.
The government plans to transfer 3.2 trillion rupees ($58 billion) to beneficiaries of its subsidy schemes and welfare programmes, according to newspaper reports.
It will pay the wages for more than 50 million workers in a rural job scheme, pensions for 20 million senior citizens and about 5 million education scholarships directly to bank accounts linked to a unique identification number.
It is also likely to free farmers from the clutches of money-lenders who charge annual interest of 24-50 percent, giving them access to institutional finance.
Shiva Kumar, managing director of SBBJ, a subsidiary of government-owned State Bank of India, says the initiative will bring "financial freedom" to India's vast rural hinterland, home to about 800 million people.
"Lot more money will come into the banking system. It can boost prosperity in the villages and that will get more business to banks," he said.
Banks fear early pain - the move could burden them with 250 rupees to 500 rupees ($4.5-$9) of additional costs per account annually, while profits may remain elusive for at least 2 years.
Still, they see a huge opportunity even if only a quarter of these new accounts were to turn into regular customers, demanding loans, mutual funds and other products.
The programme could help banks and business correspondents earn about 40 billion rupees ($735 million) as fee income, Mumbai-based brokerage Anand Rathi, said in a note this month.
Banks are currently losing money in most of their rural operations, hit by highs costs, poor connectivity and low savings in areas where average per capita income is around 16,000 rupees, compared with 44,000 rupees in urban areas.

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