Home / Politics / Policy /  Govt’s push to offer banking for all stumbles on empty accounts

Mumbai/New Delhi: More than half of a record 160 million accounts opened as part of a drive to offer banking to all are still empty, illustrating the massive task ahead for one of the government’s most high-profile campaigns and the strain on banks.

Prime Minister Narendra Modi launched a scheme last August to end “financial untouchability", an ambitious project to enable tens of millions to have access to a bank. The scheme offers free insurance and even an overdraft facility and aims to eventually help deliver all subsidies and other social benefits to the poor directly.

But while millions signed up—the volume of accounts made a Guinness World Record and Modi hit his target—53% of these accounts have never been used as of 3 June, records show.

Activating these accounts will be the biggest test yet for Modi’s banking drive: a push the government hopes will curb the use of cash, limit corruption and rein in the informal economy.

“It’s always been a challenge, particularly in the rural areas where the population is not literate. They are scared actually to go to the bank," said Ram Sangapure, an executive director at number four state-run lender Punjab National Bank.

Lambodar Mishra, 37, who runs a small grocery shop in Odisha, was one of many villagers the government targeted.

He and his two young sons opened accounts last year but have never gone back to the bank 5 km away from their village.

“Why do I need a bank? Whatever I earn, I put in my business, I buy things to sell in my shop. I don’t earn a lot."

Many in rural India have been left behind by modernisation. Low rates of literacy have also deepened suspicion of paperwork and plastic and popularised cash.

Industry experts say payment mechanisms could be improved while the government could provide more subsidies directly—a process which could take several years to complete—to encourage the use of bank accounts.

Banking on it

State-run banks dominate India’s banking landscape and have driven the government’s inclusion campaign. But they are struggling with bad debt and slow lending growth, and getting Indians to use the new accounts will make the difference between a long-term cost and a long-term opportunity.

“These accounts which today we think are a liability and an expense to the bank, maybe down the line, in a year or so, these accounts will start yielding some returns," Sangapure said.

Bankers and industry experts estimate the cost of opening and maintaining a bank account at between 200- 250, which means the annual cost of the empty accounts for Indian banks could add up to some 2,100 crore.

That is excluding the lost opportunity had cash been in the account—deposits are a key source of funding for Indian banks, which pay roughly 4% interest on savings but lend that money at rates of 10% and higher.

The financial inclusion campaign has seen progress. Fallow accounts made up 77% of the total last September, a month after Modi launched the scheme. That has dropped to just over half.

But some say banks sorely need more direct transfer of subsidies, as well as banking products catering for the needs of the urban and rural poor, to get more people to use their accounts.

“With the full scale launch of direct benefit transfer to these accounts, we understand the usage of account would improve substantially," said Vikaas Goel, who works on financial inclusion at remittance provider Fino PayTech.

Indian federal and provincial governments subsidise a variety of commodities and services at an annual cost of nearly $59 billion, or about 3% of the nation’s gross domestic product (GDP).

Subsidies that started flowing into the accounts this year have helped lower the number of fallow accounts. The government plans to transfer all subsidies including food, fertiliser and kerosene, potentially taking direct payments to more than $60 billion.

In comparison, money in active accounts run under the scheme totalled about $2.8 billion as of 3 June. Bloomberg

Catch all the Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less

Recommended For You

Trending Stocks

Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout