The right-wing talking heads have put the cost of Prime Minister Narendra Modi’s financial inclusion plan at over Rs 100,000 crore. In his maiden Independence Day address to the nation, Modi announced that every household will be brought under banking net and they will also be given an insurance cover of Rs 1 lakh. The ambitious financial inclusion plan also includes Rs 5,000 overdraft facility for each account holder.
The cost numbers arrived at by some right-wingers are based on the premise that Rs 1 lakh on insurance and Rs 5,000 on overdraft facility will be the government’s expenditure on each account. However, this is far from being true. First, we should not assume that all poor citizens who will avail the overdraft facilities would default. In fact, industry data shows that majority of the defaulters are either corporates or the so-called high net worth (HNI) individuals. We often hear the news of poor farmers committing suicide just because of their inability to repay a loan of say Rs 50,000 or Rs 1 lakh. For majority of them default on loan is related to self-esteem. Sadly, several of them chose to end their life instead of being called defaulters.
India’s listed banks had gross non-performing assets (NPAs) or bad loans to the tune of Rs 2.5 lakh crore ending March 2014. Government-run banks that account for two-thirds of loans, have over 80 per cent of bad assets. Gross NPA of public sector banks rose to 4.03 per cent in the financial year 2013-14 from 3.42 per cent in 2012-13 and 2.94 per cent in 2011-12.
Poor or middle-class account holders form miniscule part of these massive and increasing bad assets of banks. Majority of poor citizens do not have accounts so they have no role in the Rs 2.5 lakh crore bad assets of banks. Therefore, it is ridiculous to reach the conclusion, equating Rs 5,000 overdraft facility with expenditure. The overdraft facility is proposed to be backstopped by a Credit Guarantee Fund and used for repayment of old borrowings. So the chances of defaults are going to be minimal.
The cost of providing insurance is also misplaced. It would be irrational to judge that all those extended the insurance cover will be required to avail it. All those people given the insurance cover are not going to die or meet with an accident to avail the facility! Some public sector lenders, including State Bank of India (SBI) offer Rs 1 lakh accidental insurance facility to its account holders at an annual premium of Rs 100. If we need to calculate the cost, this should be the benchmark.
Under Modi’s financial inclusion plan called “Pradhan Mantri Jan Dhan Yojana” the target is to open 150 million accounts, two each for 75 million unbanked households by 2018. The annual cost of providing Rs 1 lakh accidental insurance cover to 15 crore account holders should be Rs 1,500 crore, if we go by the SBI premium rate, assuming that the country’s largest lender product is commercially viable.
Moreover, the insurance and the overdraft facilities linked to the accounts is an attempt to make the financial inclusion plan meaningful. Without these facilities it would meet the same fate as the programme run during the previous regime. The focus of financial inclusion during Manmohan Singh government was “no-frill” accounts, which were basically “no-use” accounts. While the banks opened the accounts to comply with the government’s diktat, hardly any transactions took place through these. The “no-frill” accounts are the basic savings accounts with no minimum balance and fewer paperwork requirements. More than 80 per cent of accounts opened under financial inclusion programme of UPA government have remained dormant.
If we consider the possible benefits of the new programme, the cost is really modest. Formal banking transactions could help curb leakages in subsidies and other social service programmes. According to a study by Barclays, channelisation of food subsidy though Aadhaar-based cash transfer system could result in savings to the tune of 0.2 to 0.3 percent of GDP. It could add 0.2 per cent to GDP growth by encouraging savings and an additional 0.4 per cent by curbing tax evasion.
In fact, if the plan is implemented successfully, it will benefit all – the customers, the banks as well as the exchequer. It would help stimulate growth, plug leakages, corruption and cut transaction costs. As per the RBI data, almost 90 per cent of all monetary transactions in India are still in cash. While, cash transactions form a very small part of the overall transactions in the developed countries. For instance, in the United Kingdom cash transactions form just 2 per cent of overall transactions. In Australia it is 3 per cent and Japan 6 per cent.
The financial inclusion programme should additionally focus on reducing the cash transactions, say to 50 per cent in medium-term from the current 90 per cent. A remarkable success in mobile penetration should help in financial inclusion plan and reducing the dependence from cash transactions.
During his Independence Day address, Modi rightly gave reference to mobile penetration while announcing the plan. “There are millions of families who have mobile phones but no bank accounts. We have to change this scenario,” the Prime Minister said. “Economic resources of the country should be utilised for the well-being of the poor.”
(Gyanendra Keshri can be reached at email@example.com)
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