New entrants in the banking sector should be strong, well-capitalised to promote financial inclusion in a cost-effective way, said a top official at RBI, which views increased access to financial services as a driver of sustainable economic growth.

RBI initiated its process of increasing banking participants with a discussion paper on issues including capital requirements for aspiring banks, for which it has sought public feedback. ?I believe banks are to be strong to do financial inclusion. When I say strong I mean they have to have the capital, they have to have methods of operations, they have to have lower cost,? Usha Thorat, deputy governor, said. The government aims to increase access to banking services across geographies, through the new players, with a stated intention of ensuring every village with a population of over 2,000 has access to such services by March 2012. New banks currently need minimum capital of just Rs 200 crore, to be scaled up to Rs 300 crore in three years after setting up operations, but Thorat argues that bigger, stronger institutions are best positioned for low-cost financial services. ?Ultimately cost, cost, cost. That?s why we we would like to see what are the capabilities and what are the competencies of the applicant to be able to penetrate at a much scaled up version at a lower cost,? Thorat said.

Thorat said lowering cost is the only way for a sustainable business model for financial inclusion. Reuters

?We don?t want banks to lose money because then they won?t do it. They have to be able to have a sustainable business model and I think it is possible. Because today there is a huge dependence on the informal sector,? she said.

The central bank has stepped up its financial inclusion drive since the last few years and now with most banks ready with the requisite technology and core banking solution, the efforts should bear fruit, Thorat said.

Lack of presence in remote areas, inadequate technology and high intermediation cost are the key challenges for banks towards financial inclusion in India.

The government is also taking keen interest in expanding banking coverage to remote areas of the country with Finance Minister Pranab Mukherjee proposing the entry of new entities including corporate houses into banking sector.

?Today a large number of small and micro entrepreneurs are not funded by formal financial system, they are funded by the informal sector and they have to pay quite a lot. So, I feel there is an opportunity (to make financial inclusion viable),? Thorat said.