On 28th August 2014, the government launched Pradhanmantri Jan-Dhan Yojana (PMJDY). The objective is to achieve financial inclusion. The initiative, spearheaded by Prime Minister’s office, has a target to open 100 million bank accounts by 26 January 2015. The target already been achieved. As of 3rd January 2015, banks have opened as many as 106.3 million accounts, out of which 63.4 million accounts are opened in rural areas and 4.29 million accounts in urban areas.
Going by sheer number of banks accounts opened, this is a remarkable achievement. Government is also thinking about showcasing this success by sending nomination to Guinness Book of World Record. It is worth noting, in spite of nationalisation of 14 largest commercial banks (way back in July 1969), financial inclusion still remained elusive for India. Until 2014, only 58 per cent of Indian households have access to banking services. Ergo, this large number of bank accounts being opened under PMJDY scheme is certainly a welcome move.
However, there is a bug. In a bid to facilitate faster opening of bank accounts, government has asked the banks to ease know-your-customer (KYC) norms. PMJDY requires minimal documentation for opening bank account. An Aadhaar card (a 12 digit individual identification number issued by the Unique Identification Authority of India on behalf of the Government of India) is proof enough to open Jan Dhan account on the spot. Attested NREGA cards, voters’ ID card are the other documentary proofs that are allowed.
For those who do not possess even these, simplified rules regarding proof of identity and address allow opening a more basic account. This is problematic. The fear is an easier KYC norm may result in rampant misuse of such accounts by hawala operators, and encourage stashing of black (read, unaccounted) money.
It may also have other disadvantages. Banks primarily make money by charging for loan, and other financial transactions such as trading for stocks, bonds, and derivatives. However, out of 106.3 million bank accounts opened so far, 83.3 million bank accounts have zero balance. Banks, especially the public sector banks, are likely to lose out as these accounts are less likely to witness any financial transaction. In fact, Reserve Bank of India (India’s central bank) worries about account being opened just for namesake, and then left unused.
This will be bane for the banks, as they still have to incur cost of operating bank branches without actually making any business. Critics argue, PMJDY only focuses on one aspect of financial inclusion which is opening bank account, without actually paying attention to the other more important aspect, that is, accessibility to credit.
However, there is another side of the story. True, as of now government is not putting any extra money except for promising an accident insurance of up to USD 1,600 and a life cover of USD 500, for those opening accounts under PMJDY scheme before 26 January 2015. But there is every possibility about the banks actually gaining from this scheme. Much of the success is conditional upon how well, with time, Aadhaar card details are actually linked with the bank accounts.
With Aadhaar card details linked, banks can actually start making money. Government has already started doling out subsidy, for LPG and other direct cash transfer related schemes such as MGNREGA using Aadhar card. In principle, approval of 2 per cent commission to be paid for direct cash transfer scheme has already been granted. Additionally, there will be no burden on banks, on account of insurance payment as promised under PMJDY scheme. National Payments Corporation of India will be covering premium for the accident insurance, and the life cover will be provided by Life Insurance Corporation of India.
Customer can avail the overdraft limit of USD 80, only after six months. By that time bankers can actually start strictly implementing the KYC norms. Favourable regulation and improved internet technology has made it possible for banks to do business through Business Correspondent (BC) agents working on behalf of banks. And this without banks actually opening any bank branches.
A report by CRISIL research (published in November 2014) has shown that banks can service their customers at about a 15th of the cost, than what is needed to open a rural bank branch. The report further stated, increasing economies of scale (with higher business per branch) and usage of low-cost channels such as through BC agents will help public sector banks making more profit, over next five years.
In short, the key word for the PMJDY becoming successful venture for the banks, especially the public sector ones, has to do with effective governance such as through proper implementation of Aadhaar card and stricter KYC norms. Some state such as Andhra Pradesh has made Aadhaar implementation mandatory. As each individual has Unique Identification Aadhaar Card Number, the scope for duplication will be plugged and the fund transfer can be monitored.
For instance, a person getting money because of MGNREGA should not ideally get pension benefits, as he is working. But because of corruption, the ‘connected ones’, withdraw money from various schemes, simultaneously. Also, the fund does not reach the intended group. All these are likely to go with proper implementation of Aadhaar scheme, enabling banks to get more money, and eventually making them profitable.