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    Jan Dhan: Another challenge for public sector banks

    Synopsis

    Banks, which are commercial entities have per force been compelled to carry out social objectives like the Jan Dhan & has resulted in various issues.

    By Madan Sabnavis

    A bank is different from a company. While a company is answerable to the shareholders, a bank is to the deposit holders who have entrusted it with their funds. So when assets go bad or banks fail, we say the deposit holders have been wronged. The unfairness to customers has been questioned of late in India where deposit holders, on whose money banks make money, have become troublesome and banks want to dissuade them from using services by charging them for everything. It is only ironic that the new design — Jan Dhan — has turned the chairs.

    The recent announcement of the financial inclusion policy that provides access to deposits, credit and insurance to everyone brings in a feeling of déjà vu. For those who lived through the seventies and eighties when we had the infamous loan melas, this raises a question on whether or not our mindset has changed after assiduously pursuing Narasimham I and Narasimham II. The present task set out to public sector banks to attain certain targets of opening deposits, though laudable, raises several questions. The government as an owner of public sector banks has a right to dictate terms to these banks, but given that they have all other kinds of problems, the timing of this is odd.

    First, banks have been trying to close down non-viable branches where there is little business in terms of the deposit accounts being maintained or used. Having millions of additional accounts (75 million being targeted) will push up the cost of holding these deposits and pressurise their margins. Banks are already in the mood of punishing small deposit holders who do not maintain minimum balances with various hidden charges. Now for these deposit holders who probably will not be active, the costs will be high. The cost of opening a deposit ranges from Rs 80-100 with an addition of Rs 100 for the debit card, which is to be waived.

    Second, to maintain these deposits, there will be costs of opening branches and staffing given the numbers. While the argument given is that technology will work, given the low level of internet penetration and the absence of electricity in most villages during the day time, will this work? Banks have already been told to start charging for excess ATM usage in metro cities. RBI data shows that on an average in a month, an ATM card rolls over just 1.4-1.5 times, which means that the usage is very low and there are several machines in non-metro cities that are hardly used (If the RBI is opening up charges for more than three ‘other bank’ ATM transactions, evidently the consumption is very high in these centres). Therefore, banks have to operate branches to be meaningful here.

    Third, banks have been asked to lend Rs 5,000 as overdrafts to these customers. How does one guarantee that the amount will be repaid? Bank lending is collateral-based, and when there is no collateral, MFIs come in. Banks have eschewed this class given the risk. Now being forced to lend to such customers, there will be further jeopardy to their NPAs given the higher tendency for priority sector lending to turn into sour assets.

    Fourth, while opening 15 million accounts in a day is good news, the question is, are the Know Your Customer (KYC) norms being followed? By diluting these norms to open accounts, we are actually degrading our systems. Generally to open a bank account one needs to go to a branch at least twice with a whole series of documents. Short cutting these processes will compromise on quality just like banks ran into a problem while meeting targets for credit cards by approaching every person outside an airport to subscribe to the same.

    The justification given is that this will help to enable the direct cash transfer scheme. The major problem with the current system of distribution is the identification issue. With sloppy methods being used under KYC here, it is but natural that there will be replication of the same in this case too.

    The challenge for banks is that out of every Rs 100 they receive, Rs 26 has to be kept aside as preemption and 40 per cent of the balance goes as priority sector lending leaving aside just Rs 44 for lending. For public sector banks, there are further pressures to be aggressive on inclusive banking and few bankers admit it is a strain as it is held to be sacrosanct. By counterintuitive logic if banks find this remunerative they should be lending more here, but they often fall short of the target. Now with this additional task being put forth, there will be several compromises that have to be made.

    The fundamental problem is that conventional thinking has been turned around. While the government is supposed to be addressing social issues, we expect it to drive growth through spending on infra projects. Banks, which are commercial entities and answerable to deposit holders, have per force been compelled to carry out these social objectives, which has resulted in various issues. Also such grandiose schemes appear to be part of Indian psyche where we like to create new systems and never bother about maintenance. So we talk of smart cities, but the existing ones continue to decay. Hopefully, this grand design will not debilitate our banking system.

    (The writer is Chief Economist, CARE Ratings. Views are personal)
    ( Originally published on Oct 22, 2014 )
    The Economic Times

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