Thursday, August 28, 2014

The Problem with PM Jan Dhan Yojana

Prime Minister Narendra Modi launched the ambitious Pradhan Mantri Jan Dhan Yojana today, a few weeks after he announced the policy in his Independence Day speech from the ramparts of Delhi's Red Fort. The plan envisages two bank accounts for every Indian household, thus bringing millions into the formal banking sector. However, there are several reasons why this plan is doomed to fail.

For one, the Indian banking sector is just too small. Despite the recent growth in rural banking, brought about by an increase in non-farm employment in the hinterland, the system is far from ready to manage such a large increase in bank accounts. Even if you add post offices, which serve as pseudo-banks by keeping deposits, it is still too small. Moreover, the existing banks are sitting on a hotbed of NPAs that have already put strain on them - and this is not the smaller cooperative banks, which are a complete disaster waiting to happen, but even the big behemoth, SBI.

Furthermore, even if state-controlled banks and the handful of private banks do somehow expand, they simply cannot meet demand. There was this sense of euphoria when Indira Gandhi nationalized the banking sector, with utopian ideas of 'people's banks' and all that garbage going around - decades later, it is apparent that bank nationalization, far from helping the poor, pushed a vast majority of Indians out of the formal banking system and right into the clutches of unscrupulous moneylenders, who have a dubious record of charging exorbitant interest rates to the least credit worthy customers and then employing downright illegal means to get them back.

The problem we face is two-fold: one, the stubborn refusal to allow well-regulated private banks into the system, borne out of a socialist legacy that left India one of the world's poorest countries, despite the fact that the public sector system has been unable to keep up altogether. While the RBI made a lot of noise about new bank licenses, the red tape that it has been stuck in has just about killed the whole idea. While Modi has made it a point to eliminate bureaucratic delays, this part of it seems untouched.

Two, the idea that has been embedded into people's minds that they don't need to pay back their loans, which flies in the face of every concept of honesty that anything remotely related to Indian tradition has taught. The socialist economy not just eroded our wealth but also our morals, with everyone expecting the government to bail them out using someone else's money. From Chidambaram to K Chandrasekhar Rao, loan waivers have been a hot political tool that have led to a steady building up of NPAs, posing a serious danger to the Indian economy. It is this attitude that has brought the banking system to its heels and has prevented it from expanding to a level that it needs to for such a large country.

It is for these reasons that, however well-intentioned, the PM Jan Dhan Yojana will not work, no matter how much time you give it. By using the same old Nehruvian formula of a big, benevolent state, Modi is making the same old mistakes again. 

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