Raghuram Rajan cautions on bullet pace of Jan Dhan implementation

Reserve Bank of India (RBI) governor Raghuram Rajan’s warning to sarakari banks, on a hunt to win maximum number of bank accounts in minimum days to make Narendra Modi government’s flagship financial inclusion scheme Jan Dhan Yojana a success, reflects the regulator’s concern on the way government using state-run banks to push its populist agenda overlooking prudential norms.

On Monday, speaking at a banking conference, Rajan highlighted the risks of hurrying for bank accounts under the government scheme.

“When we roll out the scheme, we have to make sure it does not go off the track. The target is universality, not just speed and numbers,” Rajan said.

The scheme can be a “waste”, Rajan said, if it leads to duplication of accounts if no transaction happens on the new accounts and if the new users get bad experiences.

The governor’s fears have stemmed from the record pace of account opening exercise by banks under the Jan Dhan Yojana launched by Narendra Modi on 28 August.

Banks opened over 1.5 crore bank accounts on the first day of the programme with the country’s largest lender, State Bank of India (SBI) opening about 20 lakh accounts on the first day itself. Even though Firstbiz couldn’t ascertain the exact number of accounts opened till date, the number has crossed 3 crore.

Under the programme, every account holder will get a free debit card, Rs 1lakh accident insurance and Rs 30,000 life insurance, besides overdraft facility based on the transaction in the account.

Modi has given a target of 7.5 crore accounts for banks by 26 January, i.e. in about five months. Remember, in the whole of last fiscal year, banks had opened six crore accounts.

The RBI’s concern is possibly due to the fact that in many cases those who hold existing accounts try to open new accounts to avail the freebies offered under Jan Dhan Yojana.

Such a scenario is likely because, to push the programme, banks are significantly overlooking the know your customer(KYC) norms by permitting any document for the purpose of opening account. In the absence of a single document (such as Aadhaar), chances of same person opening multiple accounts using different documents are relatively high.

Earlier, senior bankers, including SBI chairman, Arundhati Bhattacharya, had sought to make Aadhaar mandatory for opening accounts under Jan Dhan Yojana, saying, loose KYC norms could lead to duplication of accounts. But the government didn’t listen to bankers’ demand.

As Firstbiz noted earlier ,Jan Dhan Yojana has been launched indeed with the good intention of empowering the poor with the access to formal banking system, but the approach chosen to implement the programme was grossly incorrect.

At this stage, to meet the ambitious targets imposed by the government, state-run bankers are running pillar to post to find prospective account holders.

According to senior officials at various state-run banks, who spoke on condition of anonymity, not all accounts opened under Jan Dhan Yojana are fresh accounts. In the hurry to meet the targets, bankers have added lakhs of accounts, which were opened in the past and, in some cases, accounts for customers, who have existing accounts.

If indeed this is true, the original idea of expanding bank accounts to unbanked, is getting diulted. Instead, banks are simply engaging in window dressing to appease their political bosses.

If not properly managed, in all likelihood crores of newly opened accounts will lie inoperative, leaving the burden of maintaining the cost of inoperative accounts on banks and funding freebies on the exchequer.

Then, the original idea of empowering the unbanked through financial literacy and need-based access financial services will get lost somewhere.

Rajan said government should consider state-run banks as independent entities and not extended arms of the government. In Rajan’s own words, while it was fine for the government to involve banks to further the social sector agenda, it should ensure that such schemes should be financially feasible for the lenders.

After all, banks operate using the public money.

“You cannot get a mandate and cannot fund it. After all, public sector banks also have private shareholders and are not any longer an extension of the government. They should be seen as independent entities,” Rajan said on Monday.

“By all means, the public sector banks are there to undertake social actions when necessary but those mandates should be backed by financial gains,” Rajan added.

That’s a clear message from the governor to the government to not use state-run banks as mere tools to further the political agenda of governments.

Modi would do well listening to him.