By Ajit Ranade, Mumbai Mirror | May 28, 2016, 12.00 AM IST
The PM's scheme to reach the poor by giving them bank access was a great idea, but giving them unsecured loans may not be.
Two years ago, on India's independence day, prime minister Modi announced an ambitious financial inclusion scheme. It was officially launched as the Pradhan Mantri Jana Dhan Yojana (JDY), with the explicit aim of reaching the unbanked population. The PM exhorted banks to reach out to the last person without an account in the remotest part of the country. Such was the missionary zeal of bankers, that in just a few months more than 100 million such accounts were opened. The pace set a Guinness World Record. There is a website which tracks these accounts, and as of May 11, 2016 it reported 218 million accounts. This achievement is simply outstanding.
Now cue to the Economic Survey this year. This is the official annual report card of the Indian economy tabled in Parliament by the Finance Minister. This year's Survey talked about spreading JAM across the economy. No, the finance minister did not suddenly think of the whole country as a slice of bread! JAM is a trinity of J - Jan Dhan Yojana, A - Aadhaar card or the universal ID number and M - mobile phone. The Survey argued that India's poor can be better accessed and served by using the technology of these three platforms, eventually graduated to cashless transactions.
The direct benefit transfer of cooking gas subsidy is an example of JAM in action. Here's how it works - your bank account and cooking gas connection are linked to your Aadhaar number. You pay full price for the gas cylinder at the shop, which eliminates the black markets in cylinders. Your subsidy amount is credited directly to your bank account. The JAM model is being applied to many other schemes such as old age and widow pensions, and disability payments. It is possible that even ration cards, and food subsidies under the Public Distribution System will become JAM enabled i.e. you pay full price for the food grain and the subsidy is deposited in your account.
There are many critics of JAM, and the loudest in the chorus are those worried about the "Big Brother" aspect that JAM can come parcelled with - when registering for an Aadhaar card, you submit biometric data. Linking your bank and biometric data to centrally administered schemes gives the government significant access into your personal life.
Others worry that the JAM can't extend far enough because there are very few physical bank branches in remote areas. How will people access money in their accounts, if there's no ATM nearby? The government's hope is that lakhs of business correspondents will spring up (like the village kirana store) who will be the extension counters of the banks they represent. The viability of expanding banking reach through agents is still untested.
Meanwhile the 218 million accounts of JDY have already got about Rs 37,000 crores of balance. The Prime Minister in his monthly radio address hinted that these account holders will get an overdraft facility along with a credit and debit card. Which means they can spend more money than they have in their account. When will they repay? Not clear. Will the account always be in overdraft mode, i.e. showing a negative balance?
Now think about this. If of our 218 million new account holders, even 100 million decided to draw an overdraft of Rs 5,000 each, that would amount to total bank credit of Rs 50,000 crores. Since this credit is being extended without any other paperwork, or collateral, is this not like a loan mela?
The amount of Rs 5,000 per account may seem small, and similar to loans given out by microfinance institutions (MFI). But MFI borrowers have an almost 100 percent repayment record, since they are organised as self-help groups, or as joint liability borrowers. One default can black list the entire group, hence there is great repayment discipline. The only way that the MFI model fails is when it is politicised, and borrowers sense loan waivers (as happened in the undivided Andhra Pradesh in 2009).
The recent suggestion of blanket overdraft for Jan Dhan account holders, if not thought through carefully, can easily become another loan mela with huge potential losses for banks. Then the JAM will taste bitter.
