Prime Minister Narendra Modi‘s latest initiative to push financial inclusion in the country, the Pradhan Mantri Jan Dhan Yojana, has come under attack from some experts for both its ideological standpoint as well as for its effectiveness.
Prime Minister Narendra Modi’s latest initiative to push financial inclusion in the country, the Pradhan Mantri Jan Dhan Yojana, has come under attack from some experts for both its ideological standpoint as well as for its effectiveness.
On August 15, the prime minister announced the rollout of the scheme under which a free bank account will be opened for each unbanked household in India. It was also announced that each account holder will also be provided a debit card, life (Rs 30,000) and accident (Rs 1 lakh) insurance covers apart from a Rs 5,000-overdraft facility (subject to a screening process).
About 40 percent of roughly India’s 25 crore households and 60 percent of its 125-crore population, mostly poor, does not have access to formal banking services, according to government data, as Indian banks do not find operating in many of the country’s 6 lakh villages profitable.
Many, thus, have to resort to seeking credit at high rates through informal channels and this has also resulted in a parallel informal economy.
Under the Jan Dhan Yojana, the government aims to open about 7.5 crore account before January 26, 2015, of which about 1.5 crore were opened by public-sector banks on the launch day (August 28) itself, the PM announced at the scheme’s inauguration.
According to some reports, the government will later aim to open another account in each household, bringing to the total number of accounts to be created at 15 crore.
Some critics said that even as the government should prioritize promoting greater financial inclusion, it should be done keeping costs in mind.
Under the previous UPA government, about 6 crore so-called no-frills accounts were opened last year under its financial inclusion initiative but RBI data has shown that more than half remained dormant, adding up to costs for banks to continue to maintain them.
In an interview, former banker and ex-RBI deputy governor KC Chakraborty had pegged the cost of creating banks accounts at about Rs 18,000 crore, using the banking correspondent model.
Some have picked a bone with the government’s decision to extend overdraft facilities without incorporating adequate checks -- calling it subprime lending and a potential harbinger of bad loans for a sector already reeling under its worst NPA crisis in years.
This “will mean Rs 75,000 crore for 150 million accounts,” columnist Swaminathan Aiyer wrote in the Economic Times. “If these are not repaid, banks will lose Rs 75,000 crore at a time when the PJ Nayak Committee says they need to raise an additional Rs 5.8 lakh crore just to meet the new Basel norms for capital adequacy.”
Aiyer also took issue with the speed at which banks have been asked to open accounts and suggested this may have resulted in duplication -- referring to recent reports suggesting many individuals who already have bank accounts may have had accounts created for themselves, lured by the insurance covers and overdraft facilities.
Officials at some banks, which have fanned across the country recently to achieve their account-opening targets, have estimated that as much as 20 percent of 1.5 crore accounts that were created on the launch day must belong to those who are already “financially-included” and added that a screening process would later be initiated to weed out such accounts.
Defenders of the scheme have said it would go a long way in curbing corruption, alleviating poverty, enhance savings, reduce leakages in the economic system by facilitating direct transfer of subsidy benefits to the poor and even tackle Ponzi schemes.
“Nothing could be farther from the truth,” Prashanth Perumal wrote in a Mint column titled Populism Gone Berserk, while dubbing direct benefit transfers as "a mechanism evolved to keep up with political competition in spending more on targeted groups".
He also questioned the silence of so-called right-wing economists who had backed Narendra Modi’s bid for power amid hopes his supposed “free-market” economic thinking would help cut down on some of the previous government’s “wasteful populism”.
“Notwithstanding the many delusions of the Indian Right, statesmen of all kinds pursue only those policies that serve the purpose of aggrandizement of their own political power and stature,” he wrote. “Pradhan Mantri Jan Dhan Yojana is nothing more than Modi’s own attempt at efficient delivery of welfare to please voters. This trend of competitive populism can only mess up the state of public finance, which is already nothing to write home about.”