Well begun

The first big-bang initiative of the Modi government, the Pradhan Mantri Jan Dhan Yojana, has attracted more than its fair share of criticism. Critics have launched a multi-pronged attack on the scheme. Some point out that given the diluted Know-Your-Customer (KYC) norms for these accounts, the numbers (2.5 crore at last count) are bound to be overstated by duplicates. Others argue that there is nothing new about the scheme. Opening basic bank accounts is integral to the Reserve Bank of India’s financial inclusion drive; if anything, the problem was the lack of activity in such accounts. Yet others predict that the cost of servicing these zero-balance accounts, with promised overdrafts and free insurance, will weigh heavily on the beleaguered banking system.

True, the success of the Jan Dhan Yojana will lie not just in its meeting numerical targets. It must deliver sustainable financial access to its account holders. Most of the other criticisms levelled against the scheme lack substance. To begin with, the more relaxed KYC norms is a pragmatic measure, one that recognises that the current norms (requiring multiple proofs of identity and residence) act as the main entry barrier to the poor seeking basic financial access. Also, the new bank accounts are backed by biometrically-verified Aadhaar cards and banks are free to now undertake detailed due diligence to weed out frauds or duplicates. By stating at the outset that these accounts will be the primary vehicles for direct benefit transfers of Central subsidies, the Centre has created a strong incentive both for users and the banks to keep them operational. With each account linked to Aadhaar, the Centre’s food and fuel subsidies, interest subvention and loan waiver benefits can all be now targeted at the most deserving population, saving substantial costs to the exchequer incurred due to leakages and corruption. Finally, for the banks, the accounts may turn out to be viable because of the 2 to 3 per cent fee promised on all payments. The fear that the free insurance or the overdrafts of ₹2500 to ₹5000 promised on these accounts will burden the banks is largely misguided. The insurance premia are to be funded by the Centre and overdrafts will be extended solely at the banks’ discretion, based on the history of the account-holder. In any case, it is a misconception that rural folk look to the banking system only for cheap loans and overdrafts. Saradha, Sahara and the multitude of informal fund-raising schemes that have sprung up across the country prove that rural folk have sizeable savings to invest too.

Having said this, the key to the success of the Jan Dhan Yojana will lie in the Centre’s ability to quickly streamline its many subsidies and transition them to an Aadhaar-based direct transfer system. This will not be politically easy. But it will be a good way to silence the critics who are now accusing the Modi government of pandering to UPA-like populism by flagging off the Jan Dhan Yojana.

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