Consumer Issues
Modi’s Financial Inclusion Plan

Who pays Who benefits?


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.




2 years ago

The ideas are good. With good intentions the likely problems can be overcome.


Nagesh Kini

In Reply to Rajgopal 2 years ago

Sorry Rajgopal, you are wrong.It is yet another bad populist idea plain and simple.
You might not have seen to what happened to the various bank advances under the Indira-Janardhan Poojary's post emergency Loan Melas where the Congress Party got the banks to liberally dish our loans to all and sundry and when the banks went on to recover they were rebuffed - "You came to give us the money when we didn't want it and a substantial portion has been taken away by the Party goons. At the most we may repay whatever came our way." This is exactly what will happen to the "Inclusion Overdrafts" which may best be written off ab initio!

Sensex, Nifty to record more gains: Tuesday closing report

Nifty should target 7,800 and possibly higher


The S&P BSE Sensex and the NSE’s CNX Nifty put up a strong rally during the second half of Tuesday to end the trading session with gains. In our Monday market closing report, we mentioned that as long as Nifty does not break 7,650 level, an uptrend is likely. During today’s trade, Nifty breached this level in the afternoon session very briefly and then started a strong rally to close near its intra-day high. Nifty ended the day at 7,747 (up 63 points or 0.82%) while Sensex closed at 25,908 (up 185 points or 0.72%).


After a strong opening ahead of the Reserve Bank of India’s (RBI) bi-monthly monetary policy review, both Sensex and the Nifty were pulled down. The bearish sentiments set in after lower activity was reported in the services sector. Nifty, which opened at 7,706, went on to hit a high of 7,720 around noon, however, it was soon pulled down to a low of 7,638 before regaining strength to close near its intra-day high of 7,753.


The RBI maintained its stance on keeping key policy rates unchanged. The repo rate and cash reserve ratio (CRR) remain at 8% and 4%, respectively. Even though inflation declined significantly, RBI governor Dr Raghuram Rajan mentioned that “with some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spill-over to broader inflation, can be discounted.” He also cited possibly higher oil prices stemming from geo-political concerns and exchange rate movement could adversely impact inflation.


He further mentioned, “The Reserve Bank will review existing liquidity arrangements and continue to monitor and manage liquidity to ensure adequate flow of credit to the productive sectors.” The RBI cut SLR by 50 basis points to 22% 'to enhance liquidity in the money and debt markets so that financial intermediation expands apace with a growing economy’.


India’s services sectors recorded the third consecutive month of expansion, even though activity was lower in July compared to June’s 17-month high. The HSBC Services Purchasing Managers' Index (PMI), compiled by Markit, fell to 52.2 in July from June's 17-month high of 54.4. A reading above 50 denotes expansion while below signals a contraction. Overall activity was below 50 for nearly a year but starting to expand again in May.


All sectors, except for infrastructure, closed Tuesday with a gain. NSE’s CNX Realty was up 2.77% followed by CNX Auto which was up by 1.96%. The Bank Nifty was up by 0.33% closely followed by the CNX FMCG index which was up 0.34%. The CNX Pharma index was 0.63% up in today’s trade. CNX Infra, the only loser, was down 0.12%.


Cement stocks were in demand. Cement companies have so far reported better-than-expected double-digit volume growth for the June quarter. Among the top five gainers on the Nifty, there were four cement stocks. UltraTech Cement (5.32%), ACC (4.71%), Ambuja Cement (4.21%), Grasim (3.98%) and Mahindra & Mahindra (3.76%) were the top gainers on the Nifty. Among the Nifty losers were BPCL (-1.07%), HCL Technology (-0.96%), Bharti Airtel (-0.77%), Hero MotoCorp (-0.57%) and United Spirits (-0.56%).


On the Nifty, 31 stocks rallied while 19 stocks closed in the red. Of the 3,043 scrips traded on the BSE, 1,778 advanced while 1,142 declined. Trading volume on the Nifty was higher at 860 million shares traded, compared to 728.6 million shares traded on Monday. On Monday, foreign investors registered a net inflow of over Rs373 crore from the Indian markets.


Bond yields spiked to three-week highs as the RBI cut banks SLR. The 10-year benchmark yield jumped 10 basis points to 8.60% on 6th August from a close of 8.50% on 5th August.

The central bank mentioned that it doesn't intend the rupee to depreciate as it has left the interest rates unchanged. Its primary concern, it said, was to deal with inflation. The rupee appreciated to 60.83 per dollar from its earlier close of 60.93 per dollar. Crude oil prices were up on fear of disruption in supply.


European stocks were trading higher, continuing to add on Monday’s gains. The euro zone’s services PMI came in at 54.2, up from 52.2 in June. Earlier in the day, most Asian indices declined as China's services sector growth fell to a record low. China’s services PMI fell to 50.0 in July from a 15-month high of 53.1 in June. US stocks had rallied on Monday, lifted by Portugal's decision to rescue Banco Espirito Santo and better earnings of US stocks. However, in the pre-market trading, US futures were trading sharply low.


SLR rate cut may have limited impact, says CARE Ratings

According to the ratings agency, majority of banks maintained an SLR above 25% when the SLR was 23% as on 31 March 2014 and therefore, the actual impact may be limited to banks which are on the fringe of this ratio


The Reserve Bank of India (RBI), in its third bi-monthly credit policy review has reduced statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points to 22% from 22.5% of their net demand and time liabilities (NDTL). However, according Credit Analysis & Research Ltd (CARE Ratings), the impact of SLR cut may be limited to banks, which are on the fringe of the ratio.


In a research note, the ratings agency, said, "...the current SLR of banks stands at 26.7% of NDTL as of 11 July 2014. It may also be noted that a sample of 39 banks taken (private and public), five banks maintained an SLR below 25% while remaining 34 banks maintained an SLR above 25% as on 31 March 2014 when the SLR was 23%. Therefore, the actual impact may be limited to banks which are on the fringe of this ratio."


The central bank also reduced the ceiling on bank holdings of SLR securities in the HTM category to 24% of NDTL from 9 August 2014 in order to enhance liquidity in the money and debt market. "This will have a positive though marginal impact on the liquidity conditions in the market as it will depend on how banks react to the same," CARE Ratings said.


The ratings agency said, it expects inflationary pressures to continue for the next two months owing to two important factors going ahead which need close monitoring before any further monetary action: uncertainty in monsoons and higher fuel prices due to adjustment to market prices. Going ahead, RBI is expected to keep a close watch on how inflation trajectory evolves in the months ahead. Inflation may not come down when the next policy is announced."


CARE Ratings said it sees no reduction in key policy rates over the next two months. "However, " it added, "a rate cut may be considered towards the end of the year depending on the kharif output in the months of October-November and how inflation behaves."


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