RBI sets financial inclusion at a distance with 15 km cut-off

Bangalore-based Comat Technologies runs e-kiosks in villages in Haryana and Karnataka providing anything from e-enabled computer courses to railway tickets and mobile recharge.

In Bhadsa village in Jhajjar, Haryana, people were soon to have bank accounts with the Comat e-kiosk E-Disha serving as an extension counter.

The company had tied up with the Haryana government under its e-governance programme to open about 300 such centres in the state.

But Comat's CEO Sriram Raghavan says he is now reviewing such financial inclusion plans and the immediate plans for the e-banking kiosks in both Haryana and Karnataka have been shelved.

The reason is that the Reserve Bank of India (RBI) on April 24 issued guidelines on financial inclusion "" especially in rural India where the bulk of the population is unbanked "" that appear to achieve the opposite.

The guidelines stated that "with a view to ensuring adequate supervision over the operations and activities of the business correspondents by banks, it has been decided that every business correspondent will be attached to and be under the oversight of a specific bank branch to be designated as the base branch."

Banks and NGOs said the problem is not the issue of oversight per se, but the fact that the central bank has stipulated that "the distance between the place of business of a business correspondent and the base branch, ordinarily, should not exceed 15 km in rural, semi-urban and urban areas. In metropolitan centres, the distance could be up to 5 km".

"This single move takes the efforts towards financial inclusion back in time and we are where we started," said Raghavan.

Comat today has 800 centres in Karnataka and 300 in Haryana and plans 7,000 more centres in India including states like Uttaranchal, Uttar Pradesh, Sikkim and Tripura. The company was looking forward to striking deals with top banks in the private sector and public sector to act as business correspondents in many of these e-Disha kiosks in remote parts of the country. 
 

FACT FILE January 2007: Khan committee recommends business correspondents as bank agents to open accounts of the unreached masses. RBI allows NGOs, post offices, e-kiosks, ex servicemen to act as business correspondents April 2008: RBI sets limit of 15 km for operation of a bank through business correspondents
Total bank accounts:	300 million
Unbanked population (rural):	60 per cent
Unbanked population all India:	40 per cent
No of villages in India:	6,00,000
PSU, RRB rural branches:	45,000

"With 50 financial inclusion centres in Karnataka on hold for Comat, 12,00,000 people are expected to be affected. Each centre would have opened accounts for 2,500 people," said Raghavan.

Similarly, Comat has set a target of 1,000,000 bank accounts for Haryana alone this year.

BASIX, a non-banking finance company involved in microfinance, had also been keen to get into the business correspondents business. Like Comat those plans have now gone awry.

Banks that were talking to Comat and other companies and NGOs are now in go-slow mode as far as the business correspondent scheme is concerned, said Raghavan.

ICICI, which has been in talks with some companies, said it was still studying the likely impact of the guideline and no decision on the matter has been taken.

Said Vijay Mahajan, CEO of BASIX and member of a committee on financial inclusion set up by the RBI: "This guideline is simply retrograde and kills the business correspondent policy for financial inclusion that was set off after the January 2005 recommendations of the RBI's Khan committee on microfinance."

The banks had a quantitative target of including 50 million households in the banking channel in the next three years, a move that was endorsed by the central bank's Raghuram Rajan Committee on Banking Reform that submitted its report last month.

Mahajan of BASIX contends that the distance limitation is targeted at those private sector banks that don't have many branches and essentially limits the business correspondent scheme to those banks that already have rural branches.

He also pointed out that "the logic of having other means to carry forward financial inclusion was driven by the fact that banks with rural branches were not doing anything for inclusion all these years".

Mahajan pointed out that big banks like ICICI, for instance, have only one or two branches for every two rural districts. Now these are barred from financial inclusion if this guideline is followed, he said.

Bankers agree that the guideline is restrictive. "This 15-km restriction is not a good way to look at financial inclusion when the government wants banks to reach out to as many people as possible rural and remote areas," said a senior Indian Banks Association (IBA) official. The association was not, however, going to take up the matter with the regulator.

Some public sector banks also see little value in the distance limitation. "This condition may limit the competition for some public sector banks. But even with this comfort there is no clarity that they will actively work to bring those with no access to financial services into the banking fold," said a senior executive with a Mumbai-based state-owned bank.

Mahajan, whose panel recommendation for having ex-servicemen as business correspondents has been accepted by the RBI in the new guidelines, said three steps kill this financial inclusion policy.

First, it limits the business correspondent model to NGOs and post offices. Then it said only banks can pay the business correspondent's fees, making the model bank-centric. The 15-km limit for operation for every bank branch through business correspondents is the last nail in the coffin of financial inclusion, he said.

In his note on the guidelines, P Vijaya Bhaskar, chief general manager, Reserve Bank of India, justified the move saying banks must take adequate precautions and conduct proper due diligence before engaging individuals as business facilitators and correspondents.

The RBI has suggested a remedy of sorts by allowing business correspondents to apply to the district-level credit committees. Mahajan admits that this is a solution but makes the process involved and time consuming.

Close to 60 per cent of rural households do not have a bank account and only 21 per cent have access to credit from a formal source. On an all-India basis, 59 per cent of the country's adult population have bank accounts.

The RBI has been making efforts towards financial inclusion by facilitating no-frills accounts with maximum deposit of Rs 50,000 in rural India. It said the number of such no-frills accounts have increased by 6 million between March 2006 and March 2007.

With 45,000 rural and semi urban branches of public sector banks and regional rural banks, the RBI is hoping to scale up inclusion in India's 600,000 villages.

Its latest guidelines might not help improve these statistics significantly.

(With inputs from Abhijit Lele)