Banks back RBI's inclusion plan with no-frills accounts

Several banks have launched 'no-frills' accounts in the recent weeks in response to the Reserve Bank of India's call of social and financial inclusion of customers at the bottom of the pyramid.

The central bank believes that with a little innovation, banks can make sound business sense by providing basic banking services.

Last year, the Reserve Bank of India had emphasised more than once on the significance of greater financial inclusion""delivery of banking services at an affordable cost to sections of disadvantaged and low income groups. Banking services, even the very basic, are not available to a large section of the Indian population, while banks assiduously court the high-end customers.

The quantum of the number of accounts (current and savings) per 100 of adult population points to the disparity in different states. In Punjab, the figure is at a high of 105, while in Bihar it drops to 32.

In order to boost the availability of banking services in such low-serviced areas, the banking regulator, in its annual credit policy for 2005-06 (April-March), mooted the idea of a 'no-frills' account.

"In many banks, the requirement of minimum balance and charges levied, although accompanied by a number of free facilities, deter a sizeable section of population from opening and maintaining bank accounts," said V Leeladhar, deputy governor, RBI, at a recent seminar on financial inclusion. A no-frills account is essentially a nil or low balance account with charges that make it accessible to vast sections of the population.

The Reserve Bank feels banks can restrict the nature and number of transactions in such accounts if required, but these restrictions should be made known to the user in a transparent manner. Banks have also been advised to report to the Reserve Bank on a quarterly basis, the number of such deposit accounts opened by them.

State-owned banks have been quick to take the hint. A few private and foreign banks also have followed suit, albeit with somewhat higher charges.

Allahabad Bank and UCO Bank have already launched such accounts, which require a minimum balance of Rs 5. For cheque books and ATM facilities, charges of around Rs 250 would be levied.

Bank of India's basic account requires a minimum balance of Rs 50 in rural and semi-urban branches and Rs 100 in urban branches.

However, the bank has placed restrictions on the number of withdrawals during a month. India's largest private bank, ICICI Bank is also open to launching a no-frills account.

It is also working on technology-related issues such as low-cost automated teller machines and point of sale terminals.

"It will have to be technology-led as intermediation cost will have to be kept low. We will be aligned to what the regulator wants us to do," said K V Kamath, MD and CEO, ICICI Bank.

Deutsche Bank too launched a no-frills account earlier this week, albeit with a minimum balance of Rs 500. The account will provide free quarterly consolidated account statements, free personalised payable-at-par cheque books and 3.5 per cent interest rate per annum.

The RBI came out with a similar directive for regional rural banks as well. The regulator has also asked banks and regional rural banks to go for wide publicity on these basic banking facilities.

Initially, no-frills accounts will have virtually no impact on banks' financials, said analysts. "There may be only a marginal increase in operating cost," said Kanan Shah, bank analyst with Networth Stockbroking.

However, benefits may accrue to banks in the long term as more customers are garnered, he added.

"It may appear in the first instance that taking banking to the sections constituting 'the bottom of the pyramid', may not be profitable. But it should always be remembered that even the relatively low margins on high volumes can be a very profitable proposition," said Leeladhar, deputy governor, RBI.

To promote cost-effective outreach to the under-serviced areas, the banking regulator is keen on promoting linkages between banks, cooperatives and regional rural banks.

'Simple to use' cash dispensing and collecting machines akin to ATMs, with operating instructions and commands in vernacular languages may greatly aid financial inclusion, it believes.

The central bank is also evolving guidelines meant to serve its objective, which will make it easier for even less educated persons to use banking services. For example, the 'know your customer' norms are to be relaxed to the extent that to open the no-frills account, a photo identity card is sufficient.

However, a full-scale financial inclusion will work out only through multi-pronged approach. Savings and affordable credit has to be backed by awareness about financial products, education, and advice on money management and debt counselling.