Accounting Errors

Why isn't the RBI excited about Modi's financial inclusion scheme?

The central bank warned last week that a faulty rollout could create more problems than it could fix.

Of the few major schemes that Prime Minister Narendra Modi has launched since taking office, the Jan Dhan Yojana for financial inclusion has seemed like them most promising, at least from the headlines. Up to four crore accounts have been opened under the programme, according to the finance ministry, and more than Rs 3,700 crore have been mobilised by banks so far.

But not everybody is as optimistic about the programme. In the last week alone, two officials from the Reserve Bank of India have listed concerns that the government needs to attend to if it aims to ensure that the scheme doesn’t cause more trouble than it will fix.

Why exactly is India’s central bank so concerned about the potential rollout of a programme that could bring so many more people into the banking net?

Hawala smurfing

Many Indians are familiar with hawala accounts and benami transactions, involving informal brokers and fake account-owners. Smurfing, which is also known as structuring, takes this a step further. The strategy involves moving money through various accounts in a certain pattern that will ensure it avoids detection from the authorities. In 2007-'08, the RBI estimated that the hawala market likely covered 30%-40% of the entire market of remittance transfers. The sudden spike in accounts opened, coupled with slightly more relaxed rules on verifying customers, could also mean many more avenues for smurfing, a point made by RBI executive director P Vijay Bhaskar at a seminar last week.

Insurance fraud

One of the key reasons the government is hopeful that this financial inclusions scheme will be more successful than other ones in the past is that they have included various incentives. Everyone who opens one of these bank accounts gets a Rs 5,000 overdraft limit as well as Rs 1 lakh insurance cover. Speaking at the same seminar last week, Bhaskar warned that any attempt to roll out too many accounts without properly implementing Know Your Customer rules could easily lead to people opening accounts in multiple banks to take advantage of the insurance cover.

Dormant accounts

Expanding the number of accounts listed on the sheets of banks across the country could have a hugely beneficial effect on users, particularly in giving them access to cheaper sources of credit while bringing them into the financial network. But if banks end up having to build capacity for huge numbers of accounts that then go dormant, the effort would be wasted.

Already, something like 80% of bank accounts opened by business correspondents, who do the bulk of working in opening new accounts in places where there are no branches, appear to lie dormant. “The system is going to be a waste if what we do generates a whole set of duplicate accounts,” said RBI governor Raghuram Rajan. “It is going to be a waste if you do not have full coverage. It is going to be a waste if those accounts are not used, they open and they languish.”

Scaring away users

This brings Rajan to an even bigger concern: first impressions. There are many reasons that only 35% of India’s adults have bank accounts, and they don’t all have to do with a lack of access. Often, people might not have the documentation to get past Know Your Customer rules or might put more trust in a local cash-based creditor. If they do take the step of getting their documents ready to get a proper bank account, though, Rajan wants to ensure that nothing at all should go wrong.

"Many of the persons who are coming into the system are coming for the first time, so if we don't make a good first impression, they will stay out. Let us ensure it works," he said last week.

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