Prime Minister Narendra Modi could not have been more correct when he likened the problem of lack of banking services to a significant number of Indians to that of “untouchability”. In many ways, the malaise of “financial untouchability” is as discriminatory as caste biases. The sorry plight of thousands of small savers allegedly duped by a deposit-collecting firm in West Bengal last year is still fresh in public memory. At the root of all these are two primary attributes that continue to characterise the Indian economy, despite the recent rapid strides: A bustling cash economy and lack of access to basic conventional banking services. These, along with the absence of regulatory oversight, play the perfect foil for deals and schemes to thrive outside the financial system, hoodwinking authorities by creating a web of transactions to obscure the sources of slush funds.
More than four out of 10 adults in India still do not have a bank account — a statistic that tellingly brings home the importance of financial inclusion in India’s development strategy. The success, or otherwise, of State-supported welfare schemes that can deliver cash right to your bank accounts and plug leakages in India’s notoriously leaky subsidy regime will critically depend on how wide we cast the net of banking access. Financial inclusion has a direct correlation with overall economic growth. As banks were forced to open branches in remote areas, after their nationalisation in 1969, India’s savings and investment rate rose steeply from 13% to 23%. By the early 1980s India was able to put the embarrassing Hindu rate of growth of 3-3.5% well and truly behind. Mr Modi has promised to end “financial untouchability” in India as he launched an ambitious scheme to provide bank accounts to 75 million people by January 2015.
The Pradhan Mantri Jan Dhan Yojana, among other things, will also come bundled with an overdraft facility of Rs 5,000 — a move that is primarily aimed at offering an institutional solution to individuals who had been relying on money lenders who charge exorbitantly high interest rates. Overdrafts are loans, and this is where the scheme enters the risk-prone territory. The prime minister has said that unlike some industrial houses that have a poor credit repayment record, the common man and the poor made timely repayments 99% of the time. Yet, there is always the risk of competitive electoral populism. For example, what if a political party makes a poll pledge to waive off all outstanding overdraft amounts? At the aggregate level, these could amount to a substantial sum. That said, the Jan Dhan Scheme is the all-important first step. One hopes the regulatory rough edges will be smoothened out quickly enough to hedge the risks.