If one goes by the numbers displayed on the Pradhan Mantri Jan-Dhan Yojana (PMJY) website, the financial inclusion scheme remains a huge success. At the end of September 2017, it reported 302.6 million beneficiaries with bank balance of Rs66,606 crore. These were being serviced by a vast army of 126,000 bank mitras, delivering branch-less banking. However, a closer look raises many questions about this three-year-old initiative launched with great fanfare. Of these, we know from reports that nearly 10 million accounts have no transactions. 

 

For starters, we do know that Jan-Dhan accounts were targeted to launder black money by using account-holders as money mules to deposit large chunks of tax-evaded cash. A response to a question in Parliament indicates that deposits in Jan-Dhan accounts, which stood at Rs45,636 crore on 9 November 2016,  had jumped to Rs71,036 crore on 28 December 2016. We have also seen innumerable media reports since then that the income-tax department has frozen all suspicious accounts with large deposits in these accounts. And, yet, a massive Rs4,430 crore has been withdrawn from these accounts. The steady increase in balances in these accounts (in the past) suggests that these are not normal withdrawals. Did they then escape the taxman’s eagle eye?

 

There are issues with opening of the new Jan-Dhan accounts too. No bank is willing to open these accounts anymore, not even private banks which have been extremely eager to please the government. We already know that nationalised banks have incurred a high cost for maintaining Jan-Dhan accounts. To a question in the Parliament, State Bank of India (SBI) had claimed that its cost for maintaining such accounts is Rs774.86 crore. 

 

However, The Times of India (TOI) has exposed another dimension to these accounts. In a report, it says that banks are taking advantage of the ‘vague wording’ of Reserve Bank of India (RBI) guidelines for basic savings bank deposit accounts, to impose restrictions on transactions or find ways to demand a minimum balance or levy charges if the four free transactions norm is exceeded. Free transactions include ATM deposits and withdrawals, online and point of sale transactions as well as standing instructions. The TOI report names top private banks for finding ways to charge Jan-Dhan customers for more than four transactions. SBI freezes the account after the monthly four-transaction limit is reached. The Bank recently agreed to allow economically weak customers as well as students and pensioners to convert their regular accounts into basic accounts with stringent restrictions, after a furore over its decision to impose huge costs for failing to meet minimum balance requirements. Charging Jan-Dhan account-holders for more than four transactions is a relatively new development. It has happened mainly due to RBI’s studious silence with regard to exploitation of bank customers and generated anger and confusion about bank charges. 

 

Interestingly, while banks insist on capping transactions on the claim of high costs, our sources tell us that banking correspondents (BCs), who earn a commission per transaction, have been encouraging needless deposits and withdrawals of the same sum of money to bump up their commissions. This information comes from a source who has worked with the biometric identification and enrolment agencies. Despite efforts, we were unable to verify whether this is happening routinely, or even in pockets, or get information about the action taken by banks in such cases, or the turnover of BCs employed by banks.  The Indian Banks Association has prescribed a minimum compensation of Rs5,000 per month, but the guidelines for engaging BCs say that BCs may be “incentivized on business volume/transaction/milestone basis, with stipulation of a minimum threshold limit, to encourage them for business development.”

 

More importantly, banks have been allowed to pay commissions to BCs in order sell ‘new products’ launched by them. Although BCs are not allowed to collect the commission directly from customers, the guidelines are clear that since the “delivery of services and products are at the convenience of customers, we may recover the incentives and commission from the customers such commissions/incentives.” BCs are also paid commissions for new products launched by banks for these rural folks who are the target of financial inclusion. In an environment where educated urban consumers have been subject to the most brazen mis-selling of financial products and services, it is anybody’s guess what is being sold to this vulnerable segment.

Even as banks are struggling to cope with three “reforms” --  demonetisation, good and service tax (GST), and Real Estate (Regulation and Development) Act, 2016 (RERA), the potential impact of two upcoming reforms, BASEL III and International Financial Reporting Standards (IFRS) would be quite significant on banking, says a research report.

 

In the report, State Bank of India (SBI) says, "We believe that Indian banking sector need some time to assimilate the impact of past three structural changes before facing the new ones. Even as we acknowledge the positive impact of such reforms, we are convinced that perhaps the Indian banking sector deserves a small interregnum so as to meaningfully concentrate on issues related to asset quality and credit growth."

 

Over the past one year, India has witnessed three important structural reforms, demonetisation, GST and RERA, which are impacting Indian economy and the banking sector. Banking Sector, which is the key driver of Indian economy, is currently going through challenging times due to low credit growth, deterioration in asset quality and low profitability, the report says.

 

According to SBI report, demonetisation has had a significant impact on balance sheet of All Scheduled Commercial Banks (ASCBs), both in terms of size as well as composition. Banks are flooded with excess liquidity. The most important push was in the digital transactions, which has leaped around three year ahead in card transactions at point of sales (PoS). Aggregate deposits of ASCBs increased by 10.0% in September 2017 (9.3% growth in September 2016) while credit growth plunged to 6.8% from 8.9%.

 

"Touted as the most important tax reform, the impact of GST on banking is massive, SBI says, adding, "Banking services have seen a hike in tax to 18% after GST as compared to the collective tax of 15% earlier. GST implementation demands an enormous operational change requiring significant investments by the banking sector. Moreover, banks would now have to file for state-wise registration instead of a single centralized registration under the former tax regime. Not only this, number of returns to be filed on monthly basis will increase substantially."

 

 

Under RERA, a developer will have to maintain 70% money collected from home buyers in a separate account. This would leave them with only 30% of the sales proceeds to be used for any other purpose against 100% earlier. "Though RERA will safeguard interests of home-loan buyers, the new law would affect disbursement of real-estate loans with some banks seeking additional collateral clause to ensure security. The impact is already getting visible as housing loans which were grew in the range of 17-19% during July 2015-July 2016 decelerated to 10-13% recently," the report says.

 

SBI feels measuring quantitative impact of implemented or to be implemented structural reforms is always difficult to assess considering its relevance to short-term economic and fiscal costs. Past empirical studies suggest that structural reforms increases the efficiency and competitiveness of the economy, with beneficial effects for long-term fiscal sustainability. Studies shows that the short-term positive effects of some reforms are stronger during good economic times and weaker during bad times. 

 

"However for benefits to realise, we have to have a little patience as experience of Organisation for Economic Co-operation and Development (OECD) and European countries show that the actual benefits on growth, unemployment and consumption begins to manifest after two years. In essence, there could be some postponement of immediate consumption leading to negative impact in short term," the SBI report says.

 

 

Besides the three ongoing reforms, two other international mandates, BASEL III and IFRS are knocking at India's door. 

 

As per directions from the Reserve Bank of India (RBI), BASEL III capital regulation has been implemented from 1 April 2013 in the country in phases and it will be fully implemented as on 31 March 2019. 

 

Considering the huge capital requirement of around additional Rs1.1 lakh crore excluding the announced capital infusion by Government, to meet Basel III norms, the Finance Ministry has already pitched for deferring the implementation of Basel III norms beyond March 2019. The Ministry says this will help banks meet the capital needs and increase credit flow to productive sectors along with balance sheet clean up. 

 

 

"We also believe that an extended timeline to meet the capital needs would provide the necessary breather to banks to lend more while they grapple with several issues. Interestingly, if we look at the country wise implementation status of Basel III standards, India is largely compliant with the risk-based capital and liquidity coverage ratio (LCR) norms ahead of most of the countries as some countries are still underway in implementing them. Hence India could actually push the implementation slightly ahead," SBI added.

 

IFRS accounting standard is going to be implemented in Indian banking sector from 1 April 2018, and will have a significant impact on bank’s balance sheet, along with accounting systems and processes. 

 

"Adoption of IFRS will also have significant consequences on provisions, investments, financial instruments, hedge accounting valuation including regulatory compliances, information technology systems, tax calculations and other areas," SBI concludes.