Jan Dhan Yojana a Burden on Public Sector Banks?

Prime Minister Narendra Modi’s flagship financial inclusion campaign, the Jan Dhan Yojana, earned India the Guinness World Record certificate in 2014 for opening the highest number of accounts in one week. But two years later, India’s government-owned banks may be reeling under pressure due to the disproportionate number of accounts they have had to open under the scheme.

Since its launch at the end of August 2014, around 23.62 crore accounts have been opened under the scheme, according to data available on the website of the Department of Financial Services, Government of India. These accounts were opened so that the government could directly transfer subsidies without any leakages, and those deprived of financial services could have access to a bank account.

‘Herculean Task’

After the Prime Minister first announced the scheme, every bank was given a six-month period to meet a specified target. To complete this mission in the challenging time of six months “was a Herculean task” which some saw as a burden on the banks, especially the government-owned banks, Rakesh Sethi, former executive director of Union Bank of India said in an interview.

State-owned banks, he said, have lived up to the government’s expectations by opening 78 percent of Jan Dhan accounts, while 19 percent were opened by cooperative banks and a meagre 3 percent by private sector banks, Sethi added.

The lopsided burden on public banks, he said, can also be viewed in the context that private banks, which constitute 23 percent of the business, contribute only 3 percent towards accounts opened under the Jan Dhan Yojana.

“The banks’ information technology systems have been burdened with zero balance accounts, and the issue of debit cards along with those accounts, which have added to the cost of maintenance,” Sethi said.

Duplication Worries

Amid the frenetic activity, concerns were raised about the duplication of such accounts, mostly notably from the outgoing Reserve Bank of India governor, Raghuram Rajan. In a 2014 speech, Rajan had said the overall objective of the scheme is universality of bank accounts and not just speed or numbers. The scheme would be a “waste” if it leads to duplication of accounts, he added.

The Financial Burden on Government-Owned Banks

According to the scheme, a Jan Dhan account holder should make one successful transaction to avail an overdraft facility of Rs 5,000 and to claim life insurance cover of Rs 30,000. The accident cover, according to the scheme, is payable if the debit card holder has performed one successful transaction in a bank branch or an ATM.

As on August 17, 2016, 24.6 percent of accounts opened by public sector banks under Jan Dhan were zero balance accounts. The total number of accounts which offered overdraft facility stood at 67.5 lakh as on July 2016, out of which 37.88 lakh accounts were sanctioned overdraft, and 21.07 lakh accounts availed the facility. The amount of overdraft availed was around Rs 279 crore.

The cost of opening one ‘no frills account’ is Rs 200, and can go up to Rs. 350, said Abizer Diwanji, Partner of Financial Services at EY India. Banks spend nearly Rs 50 per annum on maintaining just one such account, he said.

Should Banks be Compensated?

Governor Rajan in 2014 had said state-owned banks should be compensated for activities they undertake in the public interest on orders of the government. “...we should recognise that PSBs undertake public interest activities (like the rollout of accounts under the Pradhan Mantri Jan Dhan Yojana) that are not always fully compensated. The government should endeavour to keep the competitive playing field level by fully compensating banks for activities it wants undertaken in the public interest,” Raghuram Rajan had said in one of his speeches in 2014.

But former Chairman of State Bank of India, OP Bhat, says the banking infrastructure is best positioned to do something like this, “At the moment, only banking system can do that. There’s always a cost to this, and the cost has to be borne by someone whether it’s the banks or the government.”