India: Schemes for Poor Are Fine but Why Is Government Not Addressing Banks' Qua...
India, May, 11 2015 -
Prime Minister Narendra Modi and his team at the NDA government deserve their due share of credit for initiating efforts to bring a large segment of India’s population to insurance, pension cover at cheaper cost, even as the Congress is crying foul of repacking old UPA ideas.
The three social security schemes launched Saturday nationwide — two insurance and one pension — is a follow-up to the much publicised Jan Dhan Yojana — the ambitious scheme launched by the prime minister last year aimed at bringing the poor under the coverage of formal banking.
The schemes offer Rs 2 lakh life cover at a premium of Rs 330 per annum and accident cover for a similar amount for Rs 12 per annum, much cheaper than the comparable products available in the market. The third, a pension product, permits flexible premium pay and equal government contribution.
Like in the case of Jan Dhan, underwhich banks have already opened 15 crore accounts, bank staff was given huge targets in the run up to the launch of the latest round of social security schemes to meet the target, if not surpass them. Over five crores enrollments have been completed till the launch and the government has given a target to banks of 10 crore by May 31.
Making available a full range of financial products — insurance and pension schemes — are indeed a boon to Indians, since about half of them are still outside the formal financial system. For instance, insurance penetration in the country is still only 3.9 percent, much less than the world average of 6.3 percent. Same is the case with large segments of unorganised workers excluded from the benefit of pension.
Speaking to Firstpost, SBI chairperson Arundhati Bhattacharya said these schemes are good and will help improve insurance awareness and penetration. “Pricing may need adjustment depending on experience,” Bhattacharya said.
But, there is lack of clarity on who will bear the cost of the roll-out of these products to a large number of population at such low premium. Most likely this burden will end up on banks, since the government doesn’t seem to offer financial assistance to banks to launch these products.
Any such operational losses will have to be incurred by the banks, in a way amounting to indirect subsidy by the government at the cost of banking system.
According to a senior banker, a bank gets for Re 1 rupee on the enrolment of a customer for Suraksha Bima Yojana (accident insurance cover) and Rs 30 for the Jeevan Jyoti Yojana (life cover).
“Considering that banks are using its infrastructure, staff and time for this, such returns come nowhere near even to recover the cost,” said the executive director of a government owned-bank on condition of anonymity.
Remember, banks have been struggling to move customers out of the bank branches to save costs. For a transaction conducted in the bank branch the cost is around Rs 45, while the same is done in an ATM, the cost is about Rs 18. But, when it comes to the roll-out of government schemes, customers will have to come to the branch and get the process done.
Second, couldn’t the government have planned the launch of the schemes in a bit more detail to target the yet uninsured segments by giving a relaxed schedule to the banks?
In the last week or so, bank branches have been distributing forms to join the new social security schemes to those who visit the branches.
Understandably, all of them are under pressure to show maximum enrolments.
Given that banks are at gunpoint to meet the target, a sizeable chunk of the five crore enrolments made so far have been to existing customers, who are already insured and not the ones who badly require one.
Had the target given been more flexible, probably banks could have worked towards offering the products to such customers, said the banker quoted earlier.
“That has been the case with Jan Dhan also. With these kind of targets, no one has actually time to see whether the enrolments are intended for the right beneficiary or not.”
Third, the obvious, age-old question arises what is the role of the minority shareholders and non-government investors in banks when it comes to using banks for the roll-out of government schemes. Such roll-outs require a significant amount of time and often results in loss in operations to banks, in return they are not compensated.
True, the government is the majority shareholder in public banks. But shouldn’t the shareholders be informed, if not their consent sought, before the government forces financial inclusion schemes on banks? At least in theory, state-run banks, are supposed to be autonomous, professional entities.
On one side, banks are under tremendous pressure to improve their business performance, while on the other side they are forced the burden on carrying the burden of government schemes, for which they earn peanuts.
In the past, Reserve Bank of India (RBI) governor Raghuram Rajan had warned about the risks of high-speed financial inclusion, saying this could ruin the originally intended goal of achieving actual financial inclusion.
Remember, Jan Dhan Yojana — a revolution otherwise in the history of financial inclusion in India — too suffered from the high speed-syndrome, resulting in a number of duplicate accounts.
Somehow the Modi government seems to be obsessed with speed than quality.
India is way below when it comes to social security network for its citizens. Since the government doesn’t have its own mechanism to roll out such products, using the banking network makes immense sense. Just that banking system should have been given the breathing space to properly implement the schemes and the government must address their cost-concerns.