New fund to guarantee credit to unbanked

MUMBAI: Banks will not risk losing money in advances provided to hitherto unbanked customers as a credit guarantee, partly funded by a portion of interest on these loans, will make good any losses.
The National Bank for Agriculture and Rural Development (Nabard) will manage a Rs 1,000-crore plus fund, which will be bolstered by risk premium collected by banks from borrowers.
The new financial inclusion drive to be launched by the government on August 15 will provide every new-to-banking customer an account with an overdraft facility of Rs 5,000. Bankers said that the moral hazard in these loans would be lower because of two reasons. One, the government has indicated that benefit transfer would be through these bank accounts and second, the borrowers would be made aware that failure to repay will render him ineligible for loans in future as these accounts will be linked to credit information bureaus.
The government's objective is to ensure that every individual who avails any form of government subsidy has a bank account by March 2016.
The overdraft facility is something like the spending limit on a credit card. The accountholder can draw the required funds and repay when he is in a position to do so. Once the loan is cleared he is entitled for fresh credit.
Taking up financial inclusion in the government's agenda in his Budget speech, finance minister Arun Jaitley had said, "To provide all households in the country with banking services, a time-bound programme would be launched as Financial Inclusion Mission on 15 August this year. It would particularly focus to empower the weaker sections of the society, including women, small and marginal farmers and labourers. Two bank accounts in each household are proposed to be opened which will also be eligible for credit."
Bankers say that the bigger challenge is opening the accounts for unbanked since a large number of the target group is outside the reach of banks. The government is working together with RBI on its financial inclusion plan. Part of the reason why RBI recently allowed non-banking finance companies to become 'business correspondents' of banks was to ensure that banks have enough 'feet on the street' to identify unbanked families. Besides finance companies, technology companies and companies that have been given licences to set up white-label ATMs will also be roped in to open accounts.