News / Economy

Modi to Launch Plan for Every Indian Household to Have Bank Account

FILE - An Indian woman buys vegetables at a road side stall  in New Delhi, Aug. 20, 2014.
FILE - An Indian woman buys vegetables at a road side stall in New Delhi, Aug. 20, 2014.
Reuters

Prime Minister Narendra Modi will promise on Thursday to provide a bank account for every Indian household when he launches a major initiative that could save billions of dollars in welfare spending and help mend strained state finances.

India has grown to become Asia's third largest economy, but nearly two-fifths of its 1.27 billion people do not have a bank account. This leaves them dependent on moneylenders and other informal financing routes.

In a keynote speech this month, Modi made financial "inclusion" a top priority of his administration. He followed this up by writing 725,000 emails to bank officials urging them to support the initiative.

“There is an urgency to this exercise as all other development activities are hindered by this single disability,” he said in a Twitter post.

India's Prime Minister Narendra Modi takes his oath at the presidential palace in New Delhi May 26, 2014India's Prime Minister Narendra Modi takes his oath at the presidential palace in New Delhi May 26, 2014
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India's Prime Minister Narendra Modi takes his oath at the presidential palace in New Delhi May 26, 2014
India's Prime Minister Narendra Modi takes his oath at the presidential palace in New Delhi May 26, 2014

Modi won India's biggest electoral mandate in 30 years in May with a promise to revive India's flagging economy. So far, he is yet to launch the big-bang reforms needed to break out of a cycle of low growth and high inflation.

Some commentators say his emphasis on the new banking and insurance program seeks to cement his support base among poor households with small savings. Over 40 percent of Indians live on less than one dollar a day.

The launch of the Jan Dhan Yojana, or the Scheme for People's Wealth, comes weeks after Modi blocked a global trade deal, saying it threatened the interests of poor farmers.

Under the banking scheme, account holders would get a debit card and accident insurance cover of up to 100,000 rupees ($1,654). They would also get an overdraft facility of up to 5,000 Indian rupees.

Benefits and challenges

By paying benefits directly into bank accounts, the scheme would seek to cut waste and corruption that inflate India's $43 billion subsidy bill, equivalent to more than 2 percent of its GDP, for handouts of grain, fuel and fertilizer.

The push for greater financial inclusion would also diminish the influence of money lenders and other informal financing channels who operate outside the ambit of the Reserve Bank of India (RBI), blunting its monetary policy tools.

While the drive for universal banking access is not new, the failure to provide services tailored for the poor and low-income groups has kept India way off its goal.

For example, many borrowers in the “unbanked” segment such as small-time traders need overnight loans of $25-30 that are not offered by commercial banks, making them turn to informal financing channels.

Puneet Chopra, associate director at a financial inclusion consulting firm MicroSave, said such a handicap could also trip up Modi's project.

“Without addressing the specific needs of the segment you are targeting, you cannot hope to have much success,” he said.

Modi's plan to provide an overdraft facility could also end up swelling bad loans at Indian banks as it does not spell out how the banks can collect debts.

“If there is no mechanism on the ground to collect repayments or to service the accounts, these are likely to turn dormant as soon as the overdraft is disbursed,” Chopra said.

“There is a high risk that the scheme leads to a massive dole-out of subsidies instead of assisting the targeted distribution of benefits,” he said.

Bad loans at Indian banks rose to 4.1 percent of gross advances in March from 2.4 percent in March three years ago, the RBI said in its annual report last week. Restructured loans, meanwhile, rose to 5.9 percent of gross advances in March from 2.5 percent in June 2011.

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