Friday, August 8, 2014

Modi’s Financial Inclusion Plan - Rupay Card News

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One of prime minister Narendra Modi’s ambitious plans is the massive financial inclusion drive which envisages a bank account for 150 million Indians by August 2018. The idea of financial inclusion is not new—it has been the buzzword at the Reserve Bank of India (RBI) since 2005, but without much success. In fact, several thousand new bank accounts, opened under pressure from RBI, remained dormant or did not have a single transaction. Why will it be different this time? Well, Mr Modi reportedly proposes an overdraft facility of Rs5,000 for each account, besides a RuPay debit card with inbuilt accident insurance cover of Rs1 lakh. The overdraft will be backstopped by a Credit Guarantee Fund.

Had something like this been announced by the Congress government, it would have been immediately dubbed a loan mela or another subsidy scheme. But Mr Modi’s spectacular election campaign and the 12-year Gujarat development record have ensured that doubts and misgivings remain muted.

Financial inclusion and empowering the poor is a necessity. There is no doubt at all that the poor are forced to borrow at significantly higher rates, are badly exploited by moneylenders and also forced to pay more for all goods and services. When financial inclusion was attempted though micro-finance, it led to exploitation by rapacious micro financiers, insurers and others.

Will Modi sarkar succeed in getting the same government officials to deliver where others have failed? Will moneylenders not exploit the Rs5,000 overdraft facility for repayment of old borrowings? What will the Modi government do to prevent poor, unbanked, rural folk from blowing up the overdraft, as they usually do, on marriages and religious ceremonies and on liquor?

It is significant that KR Kamath, chairman of the Indian Banks Association, while talking about how bankers were working overtime on this project said, “More than being commercially viable, it is important to link every household with the banking system.” But what happens when the overdraft has been spent and there is a default in the books of our nationalised banks? It will not only be a cost to the exchequer, but all the householders, who were recently included, will be excluded from the system again. We will watch for answers, when the prime minister unveils his grand plan for financial inclusion from the Red Fort on Independence Day.

The second phase of the financial inclusion plan talks about a pension scheme for the lower income and unorganised sector and micro-insurance through the nationalised insurance companies. Premium for insurance products will come from schemes like the Rashtriya Swasthya Bima Yogana.

A catchy name, terrific tag line, nice logo and a marketing blitzkrieg is all very well, but we would much rather hear a discussion on how the Modi government has studied and fixed all the leakages and malpractices that prevented government-directed financial inclusion and insurance schemes from working.

Instead, all we are hearing from officials and bureaucrats, desperate to please a powerful prime minister, is about the spending and hiring spree (20,000 ATMs, 50,000 banking correspondents and 7,000 branches) planned to meet the ambitious targets.

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