Economic Highlights

New Delhi, 12 September 2014

Relook Jan Dhan

NEEDS OUT-OF-BOX THINKING

By Shivaji Sarkar

Prime Minister Narendra Modi’s Jan Dhan scheme on the one hand drew over 1.5 crore responses in just two days and on the other got flak from the elite. While the poor have not exactly welcomed it, the non-poor, not necessarily the rich, have too scoffed at the idea, despite opening an account to gobble up the promised benefits – zero balance account, free credit up to Rs 5000 and an insurance cover of Rs 1 lakh.

The elite are particularly critical and rightly so. The scheme risks their deposits and raises their banking costs. They view it as subsidising the poor, through both higher banking charges and payments to be made to the banks by the governments – i.e. the taxes finding their way into the desired social inclusion objective.

Modi has imbibed the idea of the World Bank to include the most vulnerable sections into the financial system. Earlier, the country had introduced the concept in many ways through the Reserve Bank’s initiatives. There are many micro-finance schemes launched on the pattern of Bangladesh Grameen Bank.

Micro-finance companies are not allowed to function as banks or have deposits, as a precaution against ponzi-type swindling operations. This has led to higher borrowing costs and lending rates. The poor, who use it, pay 20 to 30 per cent as interest. If with regulatory checks, deposits are allowed, the cost could come down to less than half, says Ramesh Ramanathan, former head of Citibank’s corporate derivatives in London, who has started Janalakshmi lending institution for the urban Indians. Soon, he found, the customers demanded a range of services—savings accounts, insurance, and remittance channels—unavailable through group loans. “What these people want is a bank,” explains Ramanathan.

Rural credit also has similar problems. In 2005, the Government started pushing “no-frills” accounts that required no minimum balance. Eight millions signed up till 2011, but few use these accounts. Mobile banking, without a regulatory push or supportive telecom setting, has not taken off either.

Fifty-nine per cent of Indian adults lack bank accounts. A World Bank report, Gobal Findex, says that only 35 per cent of Indian adults have an account at a formal financial institution—a bank, credit union, cooperative, post office, or microfinance institution. Still account penetration in India is just below that in the rest of the developing world. It is significantly lower than that in the other BRICS economies—Brazil, the Russian Fed­eration, China, and South Africa.

This is what Modi wants to make up for. Large sections of the society, like him feel that those deprived of bank accounts need to be given one. But the question is should it be at public expense? Many say if the society has failed in creating financial strength of its people, it must own up the responsibility to build it up. It is a fine moral question but what about commercial costs.

Remember, some years ago opening a bank account was easy. Anybody could walk into a bank, have himself/herself introduced by any account holder or any other person and could open an account. However, since the past few years it has become complicated with the so-called KYC (Know Your Customer) norms, where even an existing account holder is treated like a rogue/criminal. It won’t be wrong to say that many Indians would be looking for ways to get out of the present oppressive banking system.

On the other hand, if the procedure is simplified and financial education widespread, the Government would neither have to ask the public sector banks to take on the burden of opening accounts with no balance nor would it have to pay charges to the banks for maintaining such accounts. More so as many public sector banks have become usurpers.

Likewise, the Government should consider how micro-finance units could open savings accounts. It would be an incentive for them as well as the Government may not have to take the burden of shelling out the extra fund, which could be better used.

Migratory labour particularly has a problem. Most of them do not have a fixed address. To have a bank account is difficult for them. They need to remit huge sums. Almost 90 per cent of it occurs through informal channels, usually hawala. Thus, micro-finance savings accounts could fill this wide gap.

The labour class, small and medium businesses too shy away from using the formal banking channels for fear of income-tax authorities, who swoop to have their cut, on these poor men’s transactions. Why then can’t we make banking free of income-tax (I-T) hassles?

Mobile transfers remain in a quagmire but parallel institutions use them effectively for quick transfers for remittances. In many emerging markets, the low-income consumer is served by ‘mom and pop’ service providers, who are outside the organized sector and hence not regulated.

That is the challenge of Jan Dhan scheme. Would it able to fill these gaps? Prime Minister Modi should have a relook at the problems that prevent universal banking. At the same time, he needs to rope in the local money lenders (sahukars) into the system. They provide immediate loans to the needy, take care that their recovery agents don’t visit a home in a village if a guest is there, allow women to use pawned jewellery at functions and show similar social concerns. Ironically, the most despised in many cases have become social assets.

The country also needs to realise that no-frills bank accounts are already in existence as a means of profitably serving small balance customers. The product prohibits ATMs. It also limits the number of deposits and other transactions from such accounts. Jan Dhan is an extension but is not always a solution to the sahukar.

Indian banks, especially those in the public sector, have made substantial efforts to tap the country's rural population. But expanding through branches has been a costly and largely unsuccessful endeavour. Another problem for such accounts is the income. With poor incomes; average income, as per World Bank, in this country is to touch $ 2 a day (50 paise at 2004-05 prices); such accounts in most cases might remain inoperative.

For transferring cash benefits, the Government should consider how the mobile phone – almost 80 crore have it against approximately 38 crore bank accounts – could be used. It would be easier, cheaper and reach the target without a hassle if properly dovetailed.

Undeniably, Jan Dhan is well-intentioned. Its success depends on how it benefits the masses through marrying it with fast technological solutions and includes various formal (microfinance, National Savings Scheme) and informal (sahukar and hawala) models. It can become a precursor for future financial inclusion with a little more thought and broad-basing, may be without a bank account. ---INFA

(Copyright, India News and Feature Alliance)