A year of right noise, little change


Until April, the Indian banking industry had opened about 150 million bank accounts under the Pradhan Mantri Jan-Dhan Yojana (PMJDY), the most ambitious financial inclusion programme ever attempted in any part of the world. Prime Minister Narendra Modi announced the scheme in his first Independence Day speech in 2014.

It was launched in August with a target to open bank accounts for 75 million poor people by 26 January 2015. The target was later increased to 100 million accounts. It has achieved more than that. Even the Guinness Book of World Records has recognized the achievement.

But is this drive for financial inclusion something new? The Modi-led National Democratic Alliance (NDA) government, in its first year in office, has perfected the art of serving old wine in a new bottle. A decade back, in 2005, Indian banks started opening the so-called “no-frills” or “zero-balance” accounts.

By March 2014, 243 million such accounts were opened after the banking community was goaded to launch an elaborate financial inclusion plan, revised twice. However, most such accounts were dormant as customers hardly kept any money there and this trend continues even now.

To overcome this, the Congress-led United Progressive Alliance (UPA) government launched the direct benefit transfer (DBT) scheme and made it mandatory for wages of people working for the government’s rural employment guarantee scheme to be credited to these accounts. The UPA government also launched Aadhaar, the unique identity number programme, and proposed linking Aadhaar with bank accounts that could be used as a vehicle to route all subsidies.

By adding a new angle to it, mobile telephony, the NDA government is now selling the concept of JAM trinity, something the Economic Survey of 2015 spoke about—Jan-Dhan Yojana, Aadhaar and mobile—even as the story of dormancy remains unchanged.

A recent World Bank report has pointed out that under the PMJDY scheme, at least 97% of the accounts were opened with public sector banks, but around 72% of these accounts show zero balances. Bank account penetration in India increased from 35% to 53% between 2011 and 2014, but the high dormancy rates continue to be the bane of financial inclusion in India, home to 21% of the world’s unbanked adults and about two-thirds of South Asia’s.

Before the completion of his first year in office, Modi also launched three flagship social security schemes—an insurance cover for less than Rs.1 per day, an accidental death-cum-disability cover for Rs.1 a month, and a pension scheme for the workers of unorganized sectors. Again, they want to achieve a higher scale, but by no means are they unique; variants of such schemes have been launched in the past.

The NDA government is also setting up a new agency called Mudra Bank to refinance microfinance companies that give tiny loans to the weaker sections of society where banks fear to tread. The National Agriculture Bank for Rural Development, the Small Industries Development Bank of India and, of course, commercial banks have been refinancing them, but that is not enough. Mudra Bank is yet another refinance agency. The plan, I understand, is to share a certain portion of refinance, and low-cost funds will be given in the form of a Mudra Card to the borrowers. Similar cards—the Kisan Credit Card and the General Credit Card—already exist in the system.

Has the NDA government then been peddling the same old stuff in the financial sector with new packaging and marketing gimmicks? It will be too harsh to say so. Indeed, the wine is old, but the Modi-Arun Jaitley duo has given a new label to the bottle and, more importantly, shaken it vigorously. The government has made the right kind of noises to be heard—a smart way to achieve the objective. Each of these is a critical building block required to create an ecosystem that can usher in third-generation reforms. After all, the structural reforms that we are talking about cannot take place in a vacuum. Bankers may not like the government forcing them to chase the numbers to open new accounts as they have better things to do like appraisal of credit proposals and monitoring bad loans, but these are definitely less populist than doling out a Rs.70,000 crore farm loan waiver that the UPA did. This government is sensible. Which is why it is conservative in raising the minimum support price (MSP) for foodgrains; a higher MSP adds to inflation.

To be sure, the NDA administration has its ears to the ground and knows well what needs to be done, but what it lacks is the acumen for execution. For instance, it knows that governance is an issue for public sector banks, which account for 70% of the banking industry’s assets, and this is why it has split the top post between a chairman and a managing director to avoid concentration of power, but it has not been able to appoint any chairman so far. What’s more, quite a few banks do not even have managing directors. At an offsite with bankers in Pune in January, called Gyan Sangam, ministers and bureaucrats discussed reforms in public sector banks, but we have not heard from the government on what happened after that. Of course, it issued a statement saying banks must take all decisions keeping in mind the best interests of the organization, without fear or favour. It also promised a hands-off policy. No bank boss is complaining about government interference any more, even in private.

There is also no end in sight for the pile of bad assets. Being forced to set aside money for such assets, banks are seeing erosion in capital. It’s the economy, stupid! Bankers’ wait may get longer as Modi does not have a magic wand to change things overnight.

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