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The Long Note: Dispelling Myths about Jan Dhan Bank Accounts

The Jan Dhan programme announced by the Prime Minister supposedly opened 1.84 crore accounts on one day. Much has been made of this programme, from measuring it as financial inclusion to saving people from money lenders to calling it an outright bad loan mela.

But it is unlikely to be any of these things. Let’s first look at the program:

  • A zero balance bank account is opened for people with way reduced KYC requirements
  • Each account gets a Rupay card (debit)
  • An accident insurance of Rs. 1 lakh per account, and Rs. 30,000 life cover is provided.
  • After six months, the bankers can provide an overdraft of Rs. 5,000 per account if they deem it fit.

How does it help?

The reduced KYC helps the underprivileged people create bank accounts.

At Capital Mind, we have advocated reduced KYC requirements because that is just a stupid gate. It’s better instead to have better internal checks, and to use technology to do verification instead, because your fear isn’t the poor person, it’s the rich moneylaunderer or the terrorist, and you can track movements of large sums (or massive inter-account transfers of small sums in a way to build things up).

The poor have traditionally been stopped from creating bank accounts because of this silly gate. Once they are in, then they can use the account – to keep money, to receive subsidies, to make payments, to store money as non-cash.

Bankers complain that most such accounts are inactive, but there are two reasons for it. To meet goals, bankers do just about anything to open accounts, even if it’s by forcing an existing account holder to create a new one. Second, while bankers will open accounts under duress, they cannot be forced to help people operate these accounts and deposit/withdraw cash. If you’ve ever been to a public sector bank you will see how shoddily they treat these customers (and the private sector banks don’t even let them get in the door). They have to stand in long lines, and when they get to the head, they are told that some form needs to be filled, or that something else is missing and such nonsense. This is criminal negligence and deficiency in service, but who gives a damn?

The customer, that’s who. And unless this attitude changes, the underprivileged will distrust the banks and the bankers.

Accounts remain inoperative because banks don’t want to service them. And that’s also because we don’t have enough banks – we should let 300 banks bloom, and surely some of them will want the money enough to give proper service.

Anyhow, what the Jan Dhan programme does is enforce account opening. But, as we’ll see, it’s not much more than that.

The Insurance

The cost of a Rs. 30,000 life insurance and a Rs. 100,000 accident insurance, over a large group, is not more than Rs. 200 per year (more like Rs. 50-Rs. 100), so at best the cost for 2 crore accounts is Rs. 400 crore. This is not much, and in reality even 10 crore accounts will cost the government less than Rs. 1,000 cr. For getting that level of financial inclusion this is not a lot of money (compare this with over 40,000 cr. we spend on the NREGA program).

But the fear is that claims will be a mess. Since there is “reduced” KYC, it is unlikely that insurance documentation is complete. If someone dies, who gets to claim the money? Proving “next of kin” for the underprivileged is a huge mess, given the lack of documentation. And then, who do you claim from? Does the banker help? Will suicide count? Will pre-existing diseases count?

Would it not be better to pay the Rs. 100 to Rs. 200 directly into the account, and then have the person pay the insurance company himself/herself? Suddenly insurers will have to do actual work and that, as always, is a good thing.

While the premium may be paid by the government, the poor aren’t going to really benefit that much unless the insurance company proactively works to verify people+kin. If it doesn’t, then it opens a pandora’s box of fraudsters who, after knowing a bank customer has died and that they don’t know about the insurance, will claim the insurance in their name. I’m sure someone’s already working on this business plan.

The Overdraft

Supposedly the big problem is that these customers can get a Rs. 5,000 overdraft after six months. But technically such ODs are to be granted by the banker, after they see satisfactory performance. That means the risk of such ODs is on the banker, and defaults will be investigated. Basically, the government isn’t underwriting this OD.

If the government isn’t on the hock, this isn’t a dole program.

If the account is used to get subsidies (food, fertilizer or nrega, directly paid in), then the overdraft makes sense. The limit of Rs. 5,000 is without any merit – the banker should be free to decide what level of OD he wants to give (since the bank’s on the hook anyhow).

We don’t know the operational details, but putting the government as the “backer” of such ODs will definitely result in fraud. However, such fraud is easily investigated and traced, and if they start putting fraudsters (including bankers who connive with them) in jail, much of this activity can be curtailed.

The fear of fraud should not deter us from doing good things (the poor have little or no access to credit), and in fact if we step up investigation we can find fraud, punish offenders quickly and that deters such behaviour.

Even if you assume the government pays, and 10% of all such accounts become eligible for overdrafts and another 10% of those will default, having 7.5 crore accounts (the program target) will mean defaults in 7.5 lakh accounts, which is Rs. 375 cr. If this bothers you, then you haven’t really paid attention to the budget where random veterinary institutes get Rs. 100 cr. a year.

Where is this going?

The only obvious benefit is the reduced KYC. None of the real problems for banking of the poor will go away unless bankers cooperate, and honestly, for that, you need a few banks to fail, you need to create a lot more banks, ensure that corrupt bankers are jailed, and they’ll have to pull up their socks.

The second piece is that this eases subsidy payments directly into accounts. Most fraud in the subsidy game is through leakage since the money is paid to intermediaries. The fertilizer subsidy is paid to fertilizer companies, not farmers. The companies can fudge data so that they get paid more,and that’s a well entrenched game. Pay the farmer direct and have him buy on the market, and that changes equations very fast – the fertilizer companies are forced to get more efficient, the farmer gets a choice, and if there’s fraud, it’s detectible even years down the line through the payment chain.

Finally, the insurance and OD aren’t path breaking though they may help in some way. The insurance will have to be smooth, which we don’t expect right now. It’s better that such OD be based on collateral (like gold), earning capacity (incoming subsidy payments or earnings) and repayment history.

  • FB says:

    Disagree with you on crediting Rs 100-200 to bank accounts directly and asking them to pay for insurance. Numerous studies have shown that the poor typically do not end up taking insurance on their own (which is a particularly bad outcome as they need it the most). Hence, providing such account linked insurance is a better way. However, as always, the devil lies in the implementation details.

  • Just sharing my experience on this
    The banks don’t seem to be following the reduced KYC norms in spirit. For months now i am trying to open an account for my maid but that large PSU bank manager would still insist on a residence proof document despite my saying that RBI rules have changed. On the next visit i plan to take the copy of the circular!!
    On the contrary the other PSU bank which i approached for JDY, the managers were really patient in answering the queries of the lower middle class people.
    Yes among this category, there is a smarter set of people who are placing family members in every PSU bank branch to see if they could open multiple accounts in different banks and hence avail overdraft facility multiple times!

  • Asn says:

    Good analysis Deepak!

  • catbert says:

    Surprised at the skepticism people are showing towards this scheme. Let me tell you a real incident. A Bengali maid working at one of my relative’s house and her brother – both of whom get paid in cash – had saved around 50,000 Rs over six months to take the money back home on their annual trip. Since they don’t have an account, because they don’t have any address proof, she kept that money wrapped in a plastic sheet and buried it in the ground. It was eaten by termites! When I heard this, the first thing that came to my mind was – why can’t these people have bank accounts? Modi has seen life much more closely and while the so called intellectuals may not understand his methods, he knows what he is doing.

  • Sanjeev B says:

    The life insurance claim issue can be easily fixed – make it mandatory to nominate, otherwise no insurance cover. Allow multiple nominees and varying percentage for each nominee.

  • Krish says:

    I get depressed to see long ques in most of the PSU banks. These days going to the bank, getting your things done and out of the bank taking full day. Most of the branches are understaffed, new manpower on contract basis who are yet to know the full operations of the bank are only piling further misery.
    While I don’t find fault with this scheme of govt, but suspect that PSU banks are not in a position to take this kind of load. This system could trigger to put off HNIs, Urban youth or other luxury segment who are maintaining higher deposits. Migration of creamy layer customers from govt to private banks would deteriorate the balance sheet of the banks and the meagre current servive levels could only worsen.
    In one of the branch that I visited, one of the customer was unable to understand why deduction for non-maintenance of AQB was done that eroded little balance he had. Bank staff was not empathetic and unpleasnt scene was witnessed. As a result my turn got delayed and had to wait for more than 2 hours for simple issue.
    GoI/RBI could have allowed more banks or speciality banks to serve such customers instead of going through these regular PSU banks which are suffering with inadequate resources, corruption, unfriendly technology and now enforced mandate.

  • Krishna says:

    What can do already savings account holders before jan dhan program