In an attempt to encourage banks to allow overdrafting (read loan or credit) for beneficiaries of the financial inclusion plan, prime minister Narendra Modi on August 15 is said to unveil a credit guarantee fund to compensate the banks in case of defaults

A senior official of the finance ministry told Governance Now that in accordance to the objections raised by banks in implementing the plan, it has decided to set up the credit guarantee fund. The sum total of the fund could not be verified as the fine print of the mission is yet to be finalised and would only be released on August 28.

As per the plan, it would provide basic banking, insurance and pension facilities to 7.5 crore people in India, who do not have access to banking facilities. While it targets to provide banking facilities in the first phase (ending on August 15, 2015) itself, pension and insurance would be provided in the second phase (ending in 2017). Initially, a part of the plan was to allow Rs 5,000 overdraft to every account holder. But in a meeting between top bank CEOs and the finance minister Arun Jaitley on July 31, the bank officials cited their concerns in implementing the overdraft saying that it could lead to defaults since the loans would be unsecured.

Bank officials said they would read the financial behaviour of the account holders and then take a call. Accordingly, the government has decided to set up the credit guarantee fund to assuage the banks fear and encourage them to lend between Rs 2,000 and Rs 5,000 in a span of six months of opening the account depending on the behaviour of the beneficiaries.

Along with this, the finance ministry says it would launch a big financial literacy plan on August 28 to educate the poor on the benefits of having an active bank account.