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FM pushes for special banks at bottom of pyramid

business Updated: Apr 23, 2008 20:52 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
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The government favours a new class of banks to reach out to marginal farmers and landless households in rural and semi-urban areas to serve localised demand for loans and savings, Finance Minister P Chidambaram said on Wednesday.

The so-called local area banks (LABs) were first proposed in August 1996 to bridge the gap for credit and institutional lending to serve untapped zones of the hinterland, but has been facing hurdles because the Reserve Bank of India (RBI) has been standing in the way of issuing new licences.

Under the UPA government’s financial inclusion objective, every household must have a bank account. The Centre defines financial inclusion as “the process of ensuring access to the financial services and flow of timely and adequate credit for vulnerable groups such as weaker sections and low income groups at an affordable cost.”

A RBI appointed review group had recommended that no new licences should be granted to LABs because there were conceptual weaknesses on size, capital requirements and their inherent ability to absorb losses.

Loans to small farmers and entrepreneurs are a tricky business because of a need to cushion defaults. Regional rural banks (RRBs) and cooperative banks have in the past walked this difficult ground while large commercial banks are not seen as proximate or friendly enough to serve small clients.

Chidambaram told the Parliamentary Consultative Committee attached to the Finance Ministry that the government would urge the RBI to resume grant of licences for local area banks that would serve a cluster of contiguous districts.

The committee on financial inclusion, headed by former RBI Governor and chairman of Prime Minister’s Economic Advisory Council C Rangarajan has recommended a slew of measures including a larger role of rural banks. It recommended that commercial and regional rural banks should open 250 new accounts per branch every year with the focus on financing marginal farmers and poor non-cultivator households.

Chidambaram said that as in the case of most other indicators of development, there are regional variations observed in the level of financial inclusion across regions, occupational and social groups.

The finance minister said the southern region has registered far higher level of financial inclusion followed by the west, north and north-eastern regions of the country. Pondicherry is the first Union Territory to achieve full financial inclusion and Kerala’s Palakkad is the first district in the country to attain full financial inclusion.