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Financial Inclusion: No Frills Bank Accounts to Bring Masses into Banking Net

A vast segment of India's population exists on the margins of India's financial systems. Whilst the per-capita savings of this class may not be very high their sheer number means that taken together their savings are of a considerable amount. If thei

Harsh Roongta

10 Oct 2007

Opening a bank account may not be a big deal for most of us. But for a large part of the population living on low incomes, getting one was rather difficult. Whether it's your maid servant, the sweeper in your building, the vegetable vendor from whom you buy vegetables, or a construction worker -- a bank account was simply out of reach earlier.

While not many banks may be willing to lend money to this section of people because of the risks involved, the RBI is, now, pushing banks to make it easier for them to open accounts. It has suggested that banks open 'no-frills' accounts, with the simplification of 'know your customer' norms.

Reserve Bank of India (RBI) had, in its Annual Policy Statement 2005-2006, urged banks to review their existing practices to make banking accessible to disadvantaged sections of the population. Some banks, notably public sector banks, have responded and have started offering such accounts to bring low-income customers to the banking net.

What's kept the doors to the formal banking system closed to these sections so far has been their inability to provide the documents required to open a bank account. While some of them may have ration cards, most are usually unable to provide any of the other documents needed.

The result is that these people have to resort to the informal sector (like chit funds) to park their meagre savings, and to borrow money. In Maharashtra, a popular avenue is the "Beesi", in which about 20 people pool in a fixed amount every month and lend it out to anyone from the group who is in need. The borrower then has to return the amount in monthly instalments, as his/ her contribution to the pool.

This system has disadvantages for both the borrower and the lender. Since the risk levels are high, the borrower has to shell out a high rate of interest, much higher than on a personal loan offered by a bank. And members of the pool (the lenders) take a direct hit if the borrower does not return the money. In the case of a bank, the risk of default is borne by the bank, and not by depositors. Besides, neither lenders nor borrowers have the protection of government regulations and guidelines.

So what the disadvantaged sections of the population need is assistance to get an entry into the formal financial sector and reap its benefits (called financial inclusion in bankerspeak). In its Annual Policy Statement 2005-2006, the Reserve Bank of India (RBI) urged banks to review their existing practices to align them with the objective of financial inclusion.

No-Frills Accounts

The RBI has asked banks to make a basic banking \'no-frills\' account available for low-income individuals, with either zero or low minimum balances and charges.

The nature and number of transactions in such accounts would be limited, the details of which would be made known to customers in advance in a transparent manner. The RBI has also urged all banks to give extensive publicity to such \'no frills\' accounts to enable financial inclusion.

Simplification of 'Know Your Customer' Norms

The RBI has also eased the \'know your customer\' (KYC) norms to keep the procedural hassles involved in opening a bank account to the minimum. This is to enable those belonging to low-income groups to open bank accounts without documents of identity and proof of residence.

In such cases, banks can take the individual's introduction from an existing account holder on whom the full KYC procedure has been completed and has had satisfactory transactions with the bank for at least six months. The photograph and address of the prospective account holder need to be certified by the person who introduces him/her.

These simplified KYC norms are applicable for those who intend to keep balances not exceeding Rs 50,000 in all their accounts taken together. The total credit in all the accounts taken together should not exceed Rs 1 lakh in a year.

Who's Offering No-frills Accounts

State-owned banks have responded quickly to RBI's suggestions, and a few private and foreign banks have followed suit. The State Bank of India is offering a 'no-frills' account to anyone whose monthly income is Rs 5,000 or less. Account-holders need to make an initial deposit of Rs 50, and can maintain zero balances thereafter. The maximum amount one can hold in this account is Rs 10,000. The bank also offers free ATM-cum-debit card and cheque facility with this account.

Allahabad Bank and UCO Bank have also launched 'no-frills' accounts that require a minimum balance of Rs 5. UCO Bank requires a minimum initial balance of Rs 250 if the individual requires cheque books and ATM facilities.

Foreign banks too have jumped on to the bandwagon, though with a few frills. Deutsche Bank's 'no-frills' account, for instance, needs a minimum balance of Rs 500. But the account-holder gets free quarterly consolidated account statements, free personalised payable-at-par cheque books, and 3.5% interest per annum.

A start has been made, but financial inclusion has miles to go before it succeeds in bringing much of the population into the fold of the basic banking system.

What Financial Inclusion Is All About

  • Low-income groups do not have access to the formal banking systems, as they usually do not have the documents needed to open a bank account.
  • Therefore, they rely on the informal sector (chit funds, beesi, etc) for their savings and loan requirements.

  • The aim of financial inclusion, which the RBI is promoting, is to get the vast low-income population into the fold of the basic banking system through no-frills accounts

  • No-frills bank accounts are of a restricted nature and put a limit on the number of transactions.

  • The individual who wants to open a bank account needs to be certified by an existing account holder on whom all the know-your-customer norms have been completed.

Why is financial inclusion important?

A vast segment of India's population exists on the margins of India's financial systems. Whilst the per-capita savings of this class may not be very high their sheer number means that taken together their savings are of a considerable amount. If their entry in the formal financial sector is made easier these savings can be channelised for the formal economy. Also savings cum risk products that are their primary need can be structured for them once they are part of the formal banking system.