RBI introduces no-frills accounts for the masses

Thursday, January 12, 2006


The New Year is bringing a lot of good news to people desirous of availing banking services. Thanks to the initiative taken by the RBI, commercial banks in India have launched ?no-frills? accounts in response to the RBI?s call for social and financial inclusion of the country?s population, at the bottom of the pyramid. The banks have now understood that it makes sound business sense to open such accounts.

?No-frills? accounts

Anybody with a ?zero-balance? or a low balance can open such accounts. At present, banks stipulate a minimum balance of Rs 100 for non-cheque operated accounts and Rs 1000 for cheque operated accounts.

Some banks even stipulate a minimum balance of 5000. The banks can, however, restrict the nature and number of transactions in ?no-frills? accounts. But, according to the RBI, banks have to publish any such restrictions in a transparent way.

The necessity for ?no-frills? accounts has been felt by the highest monetary authority so as to deliver banking services at an affordable cost to people in the low-income groups.

Banking services, even the very basic (like having an ordinary savings account in a bank), till now, were not available to a large section of the Indian population, while banks continued to pamper the high-end customers (the so-called high net-worth individuals (HNIs) with all the banking facilities.

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

The state-owned banks have been quick to respond to the suggestion of the RBI. A few private and foreign banks also have followed suit. Allahabad Bank and UCO Bank have already launched such accounts, which require a minimum balance of Rs 5. For cheque books and ATM facilities, charge of around Rs 250 would be levied. India?s largest private sector bank, the ICICI Bank is also examining technology-related issues such as low-cost ATMs and point of sale terminals.

Some banks are worried about the intermediation cost (cost of delivering such services) but are eager to align themselves with the regulator?s suggestion.

Quite surprisingly, the Deutsche Bank has launched ?no-frills? accounts albeit with a minimum balance of Rs 500. The account will provide free quarterly consolidated account statement, free personalised payable-at-par cheque books, and 3.5 per cent interest per annum.


Let us now examine the impact of ?no-frills? accounts on a banks? financials. 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 and high volumes could be a very profitable proposition,? said Shri Leeladhar, Deputy Governor, RBI, addressing a seminar on Financial Inclusion recently.

Although the RBI has directed co-operative banks and regional rural banks (RRBs) promoted by commercial banks to expand their financial inclusion, it is necessary that there should be proper linkages between banks, co-operatives, and RRBs.

If banks are serious to accommodate the rural people, they have to install ?simple-to-use? cash dispensing and collecting machines akin to ATMs with operating instructions and commands in vernacular languages. Further the formalities connected with opening of such accounts should be simplified to aid financial inclusion in a big way.

The writer is former Assistant General Manager, State Bank of India.

Source: Deccan Herald (link opens in a new window)