India: Jan Dhan - Smaller Banks Better Suited for Job; Modi Should Have Waited

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Feb 2015
India, February, 12 2015 - At least 75 percent of the total credit of small finance banks must be lend to borrowers who qualify under the so-called priority sector category (agriculture, exports, small housing and other economically weaker sections).

There are too many takers for licences for small-sized banks.

A total of 113 companies knocked the doors of Reserve Bank of India (RBI) with applications when the deadline expired at the close of business hours on 3 February. The list (see here) includes both the biggies and tiny names.

Of the total, 72 applied small finance banks, which will carry out all banking activities of a normal bank albeit on a small scale, and the remaining for payments banks, which will offer deposit products and offer transactional services, except credit.

The two external advisory committees — appointed to scrutinise the applicants — are likely to come with their recommendations in the next few months, following which the new set of banks can be a game changer in the way banking is conducted in India.

These entities, by definition of their mandate, will cater only to the small borrower segment. The RBI has ensured this by restricting their business model to focus on the sole objective of inclusion of the unbanked and financially illiterate.

At least 75 percent of the total credit of small finance banks must be lend to borrowers who qualify under the so-called priority sector category (agriculture, exports, small housing and other economically weaker sections). Even for payments banks, the mandate is the same since the RBI has said these banks cannot hold more than Rs 1 lakh daily balance per customer.

These restrictions would logically force these two categories of banks to tap the lower end of the customers and create viable, tailor made business models in the targeted customer segment, unlike the existing commercial banks, where financial inclusion is a charity forced by regulation.

The RBI has probably learned the lesson from the past when it permitted private entities to become banks. Even though the idea of letting them also included financial inclusion, besides generating competition in the sector, not many private banks have wholeheartedly moved to rural areas. They mostly confined themselves in metros citing viability.

Applying the same logic, prime minister Narendra Modi’s flagship financial inclusion programme, Jan Dhan Yojana, would have worked better if channelled through the bank accounts opened by payments and small finance banks. Under the scheme, banks were asked to open zero balance accounts and offer free insurance, debit card and overdraft facilities.

For these banks, opening such accounts wouldn’t be an exercise they must carry out under an order from the Prime Minister’s Office, but a business proposition they are willing to execute wholeheartedly to gain markets share.

The difference would also be reflected in the quality of accounts opened thus.

Under Modi’s Jan Dhan Yoajana, banks have opened 12.54 crore accounts until January, garnering deposits worth Rs 10,500 crore. Of the total, 8.4 crore accounts, or 67 percent remain zero balance. The likely activity in most of these accounts is due to the roll-out of the direct benefit transfer of LPG subsidy to the customer accounts.

Under pressure to meet the targets, or even better the targets given by the government, banks have often turned a blind eye on strict compliance to the know your customer norms, resulting in build up of a number of duplicate accounts. This is because the scheme doesn’t stipulate on a single KYC document.

Many bankers Firstpost spoke to confirmed that duplication has occurred when the same customer used different documents to open accounts in the same banks or a separate bank, eyeing the freebies (Rs 1 lakh accident insurance and Rs 5,000 overdraft facility) that come with them. Even though, the beneficial accounts will be linked to Aadhaar eventually, banks will probably find it difficult to deal with the duplicate accounts, according to bankers.

On the ground, duplication of accounts can result in misuse of these accounts as they can be a platform for ‘smurfing’ as RBI itself has warned.

Also, these accounts have been opened at much higher cost than originally estimated. According to Indian Banks’ Association (IBA), the average cost for banks opening Jan Dhan accounts and maintaining them with benefits will be Rs 140 per account as against the earlier estimated Rs80. This makes the total cost of roll out of Jan Dhan accounts about Rs 2,000 crore.

To be sure, there are no second thoughts about the need for opening more bank accounts in a country, where more then half of the population is still unbanked. Bank accounts are indeed the basic step to handhold an unbanked citizen to the world of formal finance and relieve him from the clutches of illegal moneylenders.

Questions have been raised on the model Jan Dhan Yojana followed to achieve targets, where the basic rules of the game were ignored and the principle of need-based supply of financial services to the customer was overlooked, prompting RBI governor Raghuaram Rajan to caution on the way the programme was executed.

To be sure, theoretically, the jan dhan accounts opened by commercial banks can be migrated to the payments banks at a later stage, if indeed they set up subsidiaries to run payments bank operations.

But two factors are critical here: for one, such a migration will depend on how many banks will start payments bank business; secondly, will this address the issue of duplicate accounts already opened by banks?

Recently, RBI deputy governor S S Mundra, citing a survey, had said that a sizeable chunk of Jan dhan accounts could be duplicate accounts.

Arguably, most the issues raised could have been avoided if the government waited to push Jan Dhan roll out through the new set of small banks. These banks, considering their basic mandate, would have happily chased the right customer to make the programme even a bigger success.

Reach wouldn’t be an issue for these new set of banks since most of them will be telecom companies, retail chains, microfinance companies and ecommerce platforms, which are already present in every corner of the country and enjoy an existing client pool, even among unbanked citizens.

Also, creation of duplicate accounts would have not arisen here, since the new set of banks will purely deal with the unbanked or underbanked population. This would have been possible if the Modi government and the RBI had better coordination on the roll out of new banks and Jan Dhan.



Source : First Post
 

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