Monday, December 29, 2014

RuPay debit cards could be the Jan Dhan Yojana’s undoing


The lack of formal banking and cash is one of the toughest constraints in the rural areas of India. The Jan Dhan Yojana might be the best strategy to overcome this. But this ambitious scheme has one critical flaw that could ruin it and result in its failure to deliver on promises: the RuPay debit card. To ensure the success of the yojana, it is essential that the RuPay debit card plan be shelved, because it poses a huge reputation risk — the failure of the card could have damaging consequences for the scheme as a whole.

For families which have been offered bank accounts under the scheme, the advantages of a cash-based economy are just a step away. Except in the case of the lowest deciles, poor families do have some assets but, in the absence of a ready market for them, they are forced to make distress sales for even routine transactions. Having cash in the bank and, more importantly, a way to easily deposit and withdraw money, will be a force-changer for these families once the banking habit spreads.

The weakness in the system comes from the introduction of the debit card. It introduces the risk of a third party meddling with the savings bank deposits of crores of first-time account users. Earlier government programmes have become non-starters for similar reasons. But before going into this in detail, just imagine the landscape the debit card would create for new bank account holders. Recollect the tense times we went through when we first got cards — debit or credit. Recollect those tentative moments eons ago, when we operated an ATM machine for the first time.

In lakhs of villages across India, instead of offering frugal banking, we are trying to replicate these experiences. The debit card has to be preserved, kept reasonably dust free and intact for its magnetic strip to operate. Though the account won’t be frozen if the card is not used, the accident insurance cover gets cancelled if it is inactive for 45 days.

But this isn’t the chief obstacle. Repeated observations of auditors and independent studies about previous government schemes throw up two concerns. First, there is always one stage or point at which the beneficiary has to approach the district administration or the bank to get into the scheme. This is the point at which money could leak out of the scheme. The second concern is complication. The RBI list of frequently asked questions on the Jan Dhan Yojana, sent to all banks, acknowledges this — the “branch manager will have to advise all the related risks to the illiterate account-holder at the time of issuance of RuPay card”. The RuPay debit card is in line to be the leakage point from the scheme. It has the weakness of being complex and requiring a third party to administer.

The results could be devastating. Remember, for instance, in the Integrated Rural Development Programme, the loan scheme had two components: a subsidy provided by the government and a loan given by the bank. People may recall the standing instructions issued by bank headquarters to hand over the subsidy to the district or zila parishad representative but not to disburse the loan. The recipient got some money, the officials took a cut, and there was no pressure to repay a loan.

The Jan Dhan overdraft could meet the same fate, of being parcelled out, with the account holder getting the smallest share. To reduce the hassle and risk of keeping the card with themselves, a sizeable percentage of people, typically the weakest, might give it to someone else for safekeeping — a village leader or the bank manager. This is a real risk. The account holder knows if she does not put more money in the bank, she is safe from further loss, so, she will keep her account dry. Yet the safekeepers could purloin the account holder’s share of government subsidy.

The RuPay debit card’s problem is that it is a physical object and, like any government property, lends itself to widespread misuse. A far better option would have been a frugal banking plan based solely on a single-number platform like Aadhaar, with biometric identification, or a telecom number-based identification platform like M-Pesa for the Jan Dhan account holders to remember and use. Every benefit could have been credited to this account.

The debit card adds nothing to the experience of operating a bank account for the new entrant but has all the elements necessary to wreck it.

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