1 cr bank accounts in a day: 5 reasons Modi's Jan Dhan Yojana won't work

The Narendra Modi-government has somewhat bought the idea of universal bank accounts, something first proposed by the Nachiket Mor panel in January, 2014.The plan hasfinally taken a concrete shape and was launched today

The primary objective of the programme, christened Pradhan Mantri Jan Dhan Yojana, is to deepen financial inclusion. As many as 60000 bank camps will be conducted and about 1 crore accounts are targeted to be opened in just one day.

There are two key differences with the Aadhaar-linked universal bank account plan of Mor and the BJP-promoted financial inclusion plan.

For one, the latter will have more reliance on the data sourced from the National Population Register to fulfil KYC purposes, along with Aadhaar, instead of the Aadhaar-linked model proposed by Mor.

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Second, the burden of implementation will fully rest with public sector banks, who have been given a target to open 7.5 crore accounts in a year as the phase-I by making good use of business correspondents (BC) and mobile banking model.

This will probably be followed by a second phase, where the remaining citizens of the households will be covered over a period of next 2-3 years. The scheme was announced on Independence Day as the flagship financial inclusion mission of the BJP government.

Why not Aadhaar? Beyond the obvious reluctance to embrace UPA’s flagship programme, there could be one other factor that concerns the BJP government-chances of illegal immigrants from Bangladesh getting the legal sanctity of a national registry by virtue of obtaining an Aadhaar number.

Part of this exercise could be a possible examination of the information pool of those who have already enrolled under Aadhaar in certain geographies to see that the enrollment process is kosher.

Spreading financial inclusion - the process of spreading the banking services - in Asia’s third largest economy is critically important to rescue the poor and economically weaker sections from the claws of informal financiers. There are no two ways about that.

Financial inclusion has progressed in a depressingly slow pace, despite 60-long years of independence, and several decades of existence of nationalised banks and progress of technology, especially mobile-based in the last decade.

This despite the RBI formally launching a three-year financial inclusion plan through state-run banks in 2010 and later following it up with another three year plan beginning 2013 through multiple channels such as BCs and issuance of no-frills or zero balance accounts.

Bank accounts are indeed the first step for someone in the hinterland to step into the world of formal finance.But merely pushing state-run banks to open banks accounts and extend overdraft to those who do not have a credit history could make financial inclusion a fear-generating word for executives at government-banks, and a form of obligation to appease bureaucrats and political bosses at the centre, regardless of whether the poor will actually end up using the account or not.

The approach adopted to achieve inclusion shouldn’t be free distribution of bank accounts but a need-based one.

There are certain aspects that are relevant here:

First, just by opening free/ zero balance bank accounts, or no-frill accounts, no single citizen gets financially included in the system in its true sense. Often, such an exercise-imposing bank accounts to one with little money in hand no idea about what else could one do with a bank account-has backfired by leading to thousands of inoperative accounts. The reasons are obvious. Account holders didn’t have regular and assured income to put money in banks, nor did banks have the appetite to offer micro loans for these customers or accept tiny deposits.

As long as the poor remains poor and don’t have savings, bank accounts opened for them as part of a financial inclusion programme will remain inoperative. It might be too early for them to embrace the world of commercial banking. The other way-wherein people with sufficient financial literacy and in need of a bank account to meet their savings and credit needs in line with their improving standard of life -would work better. Those bank accounts are unlikely to remain idle. In the absence of proper planning, these accounts could end up only being the carriers of government benefits to people.

Second, absence of tailor-made financial products for the poor. There isn’t an accurate estimate available for the actual size of informal finance market in India, but is at least Rs 30 trillion, as per some estimates. A majority of the poor and un-banked still resort to illegal chit funds and private money lenders to keep their hard earned money and avail of tiny loans, not necessarily because a nearest bank branch isn’t available but because the bank often doesn’t want to give him/her a Rs 5000 loan or accept a Rs 500 deposit.

Whether one has an account or not, a commercial bank typically doesn’t do business with a customer unless they see a fairly large value transaction or a stream of potential cash flows.

Hence, a better proposition may be to increase awareness among the un-banked about the benefits of having a bank account, rather than forcing it on them merely for the sake of showcasing better numbers. This could be achieved using the expertise of financial intermediaries at the lower end of the pyramid–such as microlenders and self-help group/joint liability groups–who know much better than commercial banks about dealing with the poor.

Third, further relaxation of the KYC norms for small value accounts. The definition of small value accounts can be decided by the central bank. The RBI has already begun acting on this by making single address proof enough for opening bank accounts. There is scope to relax this further for small value accounts by letting them open a bank account based on their national identity number-Aadhaar or NPR.

This will encourage a lot more people not just to walk into a bank branch and open and account, but also to begin using the facility actively, thus serving its actual purpose.

Fourth, make maximum use of the microfinance companies to reach the poor and un-banked. The platform was set for this move when, in June, RBI allowed NBFCs to act as BCs. This has permitted even microlenders to do this job. NBFC-MFIs have years of experience in dealing with small value loans with rural customers. An arrangement can be designed where banks use such firms more effectively to reach out to the poor and offer financial services.

Fifth, there are no reasons why private and foreign banks are not asked to push financial inclusion in the same way as public sector banks do. Why it is always state-run banks that are used to bring about the greater cause of financial inclusion, something of national interest, and not the private sector banks? In the past three-four years, participation of private sector banks in lending to farmers and other economically weaker sections have lagged way behind state-run banks, despite private banks expanding presence in rural areas. This cannot be the case if inclusion needs to happen.

Let’s use our resources with prudence.