Inclusion banking will soon be profitable: Union Bank

Union Bank of India, the fifth largest public sector lender with over Rs 3.55 lakh crore in assets, has said its financial inclusion project, called the 'new bankable class', will turn profitable sooner than expected.

"Going by our experience with the financial inclusion project, which we call 'banking for the new bankable class', this will turn in profits sooner than later, especially when the cash transfer facilities under Adhaar scheme starts flowing in," Union Bank chairman and managing director MV Nair told PTI in an interaction here.

Nair, who recently got a three-month extension after completing his tenure, said, "For us, this is not a loss making business. Some of the segments such as remittance facilities for the migrant labourers as also those for the milk and fruit vendors, under the inclusion project are already profitable.

The MNREGA (National Rural Employment Guarantee Scheme) payments may remain in loss for some more time but then the government is subsidising it."

He said the bank got into this business three-four years ago, well before the government and the Reserve Bank began pushing it and made it mandatory from the last financial year.

"At Union Bank, we always believed in the opportunity at the bottom-of-the-pyramid and our innovative approaches have worked well so far and we hope this will continue to be so. This has given us the confidence to move into financial inclusion space well in advance.

"When we looked at this large unbanked class, we realised

that they were a future business opportunity and not a burden on our finances. Hence we started it off and looked at it as an investment for the future. And we are happy that we started it earlier than others," the chairman of the Mumbai-based lender explained the rationale behind this move.

The bank has already opened six million inclusion accounts and its project is well on course, he continued.

"The RBI has allotted us 3,159 villages. As of March 2011, we have already covered 2,511 villages. We intend to cover 10 million customers by March 2013 under the inclusion plan," Nair said.

For the new bankable class, the UNI is offering a combination of banking products such as no-frills savings account, microcredit, micro insurance, remittance facilities and overdraft, the chairman said.

However, industry analysts are not so hopeful about the profitability of the inclusion drive. For instance, Ernst & Young India partner and financial services head Ashvin Parekh is of the view that looking at the way the government and RBI are pushing this, it will impact the profitability of small banks.

According to Parekh, "the ideal model would be the government setting up some banks, specifically for the inclusion project, and once the target is met, privatise them.

"Or else, it could ask only large banks, which can absorb the losses for a longer period to drive the project and give them some tax incentives," Parekh said.

Source: Business Standard