100 days of Modi govt: Jan Dhan is a hurried revolution in banking; it could backfire

In his first 100 days in office as the prime minister, Narendra Modi wanted to begina banking revolution in the country by extending the reach of no-frills accounts to millions of poor in remote areas.

But the sheer hurry and absence of adequate backup mechanism in place, could give Modi the work of many more years to set what he possibly didn't do right in the first 100 days.

The subject here is the much-hyped Jan Dhan Yojana, launched by Modi on 28 August, with the stated intention of bringing in crores of poor households to the formal banking fold.

Under the plan, banks were asked to expand the number of basic bank accounts by at least 7.5 crores by the end of January to meet the targets given by the new government.

To be sure, Modi's stated intention was noble since about a half of the country's adult population still do not have access to formal banking sector, forcing them to turn to the local money lender to fulfil their banking needs.

In that sense, efforts to promote financial inclusion are a must for the country.

One of the much-highlighted objectives of the plan is to use these accounts for the transfer of government benefits to the beneficiaries such as subsidies and other cash transfers.

Under the Yojana, these accounts will be given a free debit card and an overdraft of Rs 5,000, provided they manages to show some transaction within six months.

In the first two days, banks ended up opening some 2.14 crore accounts - one-third of what they opened under financial inclusion in the whole of fiscal year 2014 (about Rs 6 crore) - taking the total number of basic savings accounts to 24 crore.

According to official estimates collated by Firstbiz, the country's largest lender, State Bank of India opened 20 lakh accounts in the first day of the programme, Punjab National Bank opened 13 lakh and Union Bank opened 9.4 lakh, to name a few.

But where Modi possibly went wrong was when bankers were put at gun point to meet the targets, in turn, forcing them to offer accounts to everyone on the street, who met or not met minimum KYC requirements.

Even though the government's intention may be noble - upliftment of the poor and unbanked - the faulty/hasty way of implementing it could result in serious issues to the banking system.

Since the new account holders were allowed relaxed documentation, bankers fear duplication of accounts or a situation, when the same person opens multiple accounts to avail the freebies.

Besides, the government still doesn't have clear plan about how it plans to compensate banks in the event of possible losses, even though it assures of it.

RBI's concerns

The Reserve Bank of India (RBI) has raised its concerns about the way the Jan Dhan Yojana is being implemented.

By law, the central bank is not an independent, autonomous body. Theoretically, the government is the boss of the central bank. And it may not be a good idea always to talk back at the boss for reasons obvious.

Hence, the RBI, with its sheer focus on prudence, sometimes leaves enough hints of its concerns if and when the government indulges in populism. The hope is that the power centres get the message and act up on it.

In the run up to the much hyped financial inclusion programme and in the days that immediately followed the announcement, the RBI has let know the public (and the government) its thought process on the massive financial inclusion programme.

There have been at least two instances when the RBI has opened up its mind on the matter - one when RBI governor Raghuram Rajan commented on the interview to The Times of India, when he talked about the dangers of doing something very fast.

To a question on the consequences of the breakneck speed at which Jan Dhan Yojana is implemented by Modi government, Rajan said: "We will have to see . . .Some of these things (seeding with Aadhaar) - if they are all brought together - can reduce potential risk. When you do something very fast, there is a risk that documentation may not be as good as it should be. So long as there is a back-up and reliance on some of the things that have been done, you can mitigate the risk."

Unfortunately, Rajan's fears on KYC might very well come true since banks haven't insisted on a single document for KYC. In fact, some of the banks have let accounts be opened with self verification or recommendation by an official of the local body.

Given that Aadhaar is not mandatory for account opening under the Yojana, chances of opening fake/ duplicate accounts are high.

The second mention (rather indirect) on the populist scheme came from Deepali Pant Joshi, one of the executive directors of the central bank. Speaking at the Financial Inclusion Conclave of Dun & Bradstreet, Mumbai, on 26 August, Joshi said financial inclusion targets should focus on usage beyond cash transfers.

"Implementation and monitoring of financial inclusion targets should focus on usage of bank accounts, and expand beyond transfer payouts," Joshi said.

"As the recent inter Media survey shows, only half the bank accounts have been active over the previous three months. In order to increase transactions, there should be clear communication to customers about the mission and banks should be incentivised to provide appropriate products that increase usage."

This could be interpreted as "please do not just push banks to keep opening zero-balance accounts. Think about ways if they have actual usage. Otherwise it may not have the desired result."

Modi's next target for banks is to open 7.5 crore accounts by 26 January i.e. five months from now.

If Modi gets the message from the RBI, he should stop forcing banks to make world records by opening maximum number of accounts in days, and instead let banks expand their reach to genuine beneficiaries within realistic targets, so that one single individual will not end up having four accounts and draw undue benefits, while the needy ones are still left out there.

There is always a danger in offering freebies and if not handled properly, Jan Dhan Yojana could prove to be a major mistake in Modi's stint as prime minister.

Updated Date: Dec 21, 2014 14:04:35 IST