Jan Dhan Yojana: Modi's using state-run banks for political mileage

In the last 10 days, public sector banks have been competing each other with unprecedented aggression to make visible their active, wholehearted participation in prime minister Narendra Modi’s flagship financial inclusion programme - Jan Dhan Yojana, formally launched today (28 August).

The plan requires nationalised banks to open 7.5 crore bank accounts, offer a free Rupay debit card and accident insurance of Rs 1 lakh for each account. Further, an overdraft of Rs 2,000 will be provided to each account holder after satisfactory operation in the account for six months.

The accident cover will be doubled for those who join in the initial 100 days.

The aggression among bankers is clearly visible.

“Yes we are confident of achieving the programme. It will be done,” said a senior banking industry official when asked how confident is he about achieving the target.

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Interestingly, a few days back, the same banker had highlighted the challenges of implementing the massive financial inclusion programme.

“Who will bear the cost of going to rural areas? Should a bank operate an account only for getting government benefits?” the banker had asked then.

Surprisingly, his concerns have vanished in a matter of few days. What caused it? The answer possibly lies in the endless missives originated from North Block and Prime Minister’s Office to the offices of state-run banks pushing the plan.

According to a PTI report, 7.25 lakh emails have been sent to bank officers informing them about the financial inclusion scheme, which Modi had announced in his Independence Day address to the nation.

As per the plan, banks will organise more than 60,000 camps in rural and urban areas on the launch day, i.e. today.

The estimated target given to state-run banks on the first day of the programme is opening one crore accounts. “It is quite possible,” told the chairman of a public sector bank to Firstbiz.

One crore bank accounts in a single day: that’s something banks haven’t done ever since barter system gave way to currency and later to conventions of formal banking in any part of the world. Remember, in the entire 2013-14, banks opened 6 crore basic savings deposit accounts under the financial inclusion programme-the aim is to open one-sixth of this in a single day. (As of March 2014, the total number of such accounts stood at 24.3 crore.)

To be sure, it is not impossible for the banking system to do so given the massive branch network and reach of state-run banks in rural India.

In fact, banks have already collected required information from the new account openers through preparatory camps. One would imagine that the so-called camps were formally organised in the last 10 days since Modi announced the plan only on 15 August.

In the last few days, bankers are vying with each other to ensure the much needed public attention needed to show off their active participation in Modi’s dream project. That’s understandable because publicising the targets achieved on financial inclusion is equally important for PSBs as achieving the targets, since their fortunes are inevitably linked to that (read the annual capital infusion).

One of the government banks even issued a press release saying it planned to open more than 2 lakh basic savings accounts under Jan Dhan Yojana. Other state-run banks too have been busy organising camps to mobilise their potential account holders much like some school managements run for students to meet the minimum strength to retain their recognition.

There are a few questions remains to be answered:

First, if the government’s intention is indeed to empower the unbanked population, giving them meaningful access to formal banking services and also ensuring that they continue using those accounts, there is no logic in issuing instructions to banks, effectively forcing them, to open the magic number of one crore accounts on the launch day? Such diktats will naturally push all state-run banks run from pillar to post in their hurry to add account holders and in the process compromising on following minimum KYC norms.

By doing this, isn’t this whole exercise becoming an act of micromanaging public sector banks and using them as mere tools to gain political mileage, rather than ensuring steady progress on financial inclusion?

Second, one of the conditions, which nationalised banks had put forward in the run up to Jan Dhan Yojana was to make Aaadhar a mandatory reference document for opening the bank accounts under Jan Dhan Yojana. The idea was to avoid duplication and misuse of the freebies offered by the government along with the no-frill accounts.

Senior bankers, including State Bank of India Chairman Arundhati Bahttacharya had pointed out that Aadhaar must be made mandatory for opening new accounts, to prevent a situation where the same person open multiple accounts to avail the promised debit card and overdraft facility. Reports suggest that the finance ministry has rejected this demand from bankers. Besides, the government is so far undecided on the nature of the earlier promised credit guarantee fund intended to safeguard banks against possible defaults from free accounts. Who will be answerable to possible losses of state-run banks?

According to the ministry’s estimate, 59% of households in the country have currently bank accounts, which works out to about 71 crore bank accounts, assuming at least one per household. Now, the Aadhaar cards have been issued to about 70 crore citizens so far by the Unique Identification Authority of India.

Assuming that chances of someone who manages to get an Aadhaar card already possessing a bank account are relatively high, how will the yet-to-be-banked, who are not necessarily Aadhaar-enabled, produce Aadhaar for the purpose of opening a bank account? If the governments push banks to accept any document (electricity, telephone bills) to open accounts, bankers’ fears of widespread duplication during the programme are likely to come true.

Third, and the most critical, why are the private sector bankers totally left out of Jan Dhan Yojana and the whole burden of spreading financial inclusion imposed on state-run banks? As of March 2013, private banks had 16,000 branches across the country and many of them have increased their presence in semi-urban and rural areas. The number is not insignificant compared with the 75,000 plus branches of government banks.

In a banking system, where private banks are treated at par with public sector banks on any regulations and operations, including the priority sector lending requirement (under which banks have to lend 40 percent of their loans to agriculture, exports and economically weaker sections), what is the logic behind excluding private banks when it comes to the government’s financial inclusion exercise?

Nowhere in the world, distribution of free bank accounts have worked to empower the poor and unbanked, beyond facilitating the purpose of transfer of government benefits to the citizens .

Instead, a model, which encourages people to use the banking channels based on their requirements and increase in the income standards would have worked better.

Freebies only help to increase the number of dormant accounts and imposing cost-burden arising out of such accounts to state-run banks.

If Modi wants to experiment with the noble intention of upliftment of the poor through steady progress of financial inclusion, he should prod private sector banks to be part of the plan and lessen the burden on the state-run banks.

The rule of law says norms can’t be different for same kind of entities.