On 27 February 2020 at Guwahati, the chairman of State Bank of India (SBI) reportedly publicly faced the wrath of the finance minister (FM) since as many as 250,000 saving bank accounts belonging to tea garden workers in Assam had become dormant due to lack of acceptable know-your-customer (KYC) requirements. The result was that transfer of funds under the direct benefit scheme to these accounts could not take place.
Naturally, the FM was upset, considering that virtually the sole benefit of establishing accounts under PMJDY (Prime Minister Jan Dhan Yojana) from the government’s perspective (it was through and through a government initiative) was to enable such funds transfer. It was sold and accepted by all and sundry on this basis and the political benefits of such cash transfers are huge. The incident was not in good taste and was criticised heavily by many, especially the PSU banking fraternity.
The department of financial services (DFS), the banking industry and, of course, the politicians involved have been congratulating themselves on the humongous numbers of deposit accounts opened under PMJDY since 2014.
But initial assessment of utilisation of these accounts suggests that, after the accounts were opened, regular operations were limited. Many of the accounts were opened with zero balance just to boost the figures of the number of accounts opened. Later, to mask the fact that there were no operations in these accounts, bankers deposited paltry sums into them.
The KYC requirements for such accounts are minimal and it is difficult to see how KYC requirements could not have been done when they were initially opened. In all probability, the accounts became dormant because the account-holders did not find it either convenient or cost-effective due to which it had little utility for the so-called beneficiaries and naturally there was little usage and no incentive for ensuring that basic account maintenance requirements like KYC is done on a regular basis.
Classifying accounts in which there are no operations for long periods as 'dormant', i.e., no further operations being permitted without specific actions (like verifying the genuineness of the account holder through fresh KYC) is a well-accepted standard operational banking requirement to ensure that a customer’s account is not misused, and for prevention of fraud.
The prime purpose and utility of deposit accounts (such as those opened under PMJDY) is that it supports in de-risking consumption levels and smoothens expenditure by insuring the depositors against income shocks and emergencies – something which can make a difference between life and death for people living beyond the pale.
This aspect seems to have got missed totally in the entire publicity narrative. From the politician’s point of view, PMJDY has been promoted as an easy and cost-effective means of transferring direct cash benefits with an eye on electoral gains and has largely remained that – as amply reflected by the incident at Guwahati.
If there were regular transactions in these accounts, it would have ensured that they did not get classified as dormant and would be operational when the government wanted to make funds transfer. It is highly doubtful if any of the banks involved (or the Reserve Bank of India—RBI) are sincere to the real purport of these accounts or took any concrete steps proactively to ensure regular operations in these accounts.
The normal situation today is that for most daily workers making a transaction at the branch (deposit or withdrawal) is likely to mean a longish travel and losing one day’s earnings. Payment banks are a much-touted alternative, but to transact on an account with such a bank a person needs, at the minimum, a smart phone, an Internet Connection, and some level of literacy.
How many Indians, especially in the bottom 20%, would qualify even in one of these three essential requirements! Even more, customers should have an intrinsic trust that they would not get cheated while transacting.
Banks seem neither to have any incentives to improve utilisation of JDY accounts nor the business acumen as to think through how reducing transaction costs through use of technology could convert these myriad small accounts into a hugely profitable business opportunity in terms of giving them a huge pool of stable low-cost deposits.
Moreover, well-functioning deposit accounts can help a much larger set of our population since many more people can use deposit services than loans.
There is empirical evidence from across the world that the poor really value the small financial savings they are able to make if convenient depository services are made available and many a time are willing to borrow at a higher rate of interest rather than break the deposit.
A major reason for the regular occurrence of Ponzi schemes seems to be the absence of such depository services which forces people to look for means of keeping their savings in schemes which give a positive real rate of return – something which our banking system has consistently failed to do.
Safe, convenient and liquid deposit services also help increase the savings rate of the country, thereby reducing dependence on foreign financial investments as amply seen in the circumstances of many countries – Japan, Taiwan, and Germany. And, of course, this has been one of the much-touted benefits post-nationalisation with the opening of a large number of bank branches in the country.
Large non-performing assets (NPAs) are not the only indicator of our deeply dysfunctional banking system on account of 50+ years of mis-governance–it is apparent in each and every aspect of their operations – failure in providing basic deposit services is just one of them.
Looked at from the perspective of the main promoter of the Bank and as a politician, SBI failed in ensuring continued operations in these accounts. From the perspective of majority promoter and investor, SBI failed to realise and convert the opportunity of having such a large number of accounts into a viable business proposition.
Considering the entire gamut of circumstances, the wrath of the FM does not seem to be misplaced.
(The author worked with various banks - public, private, and foreign both in India and abroad - for nearly 30 years and is currently on a self-imposed sabbatical to try and understand as to what ails Indian banking and what, if anything, can be done to improve its functioning.)