Prime Minister Narendra Modi had launched the Jan Dhan Yojana with much fanfare. Banks were asked to open accounts of anyone approaching them with minimal questions. Proof of identity and address were often waived. This has helped many poor people who did not have satisfactory documents to open accounts. This is a welcome step towards financial inclusion.
Banks have raised no less than Rs 6,000crore in the process of opening crores of new accounts. This money will be used to finance developmental projects and will provide additional benefits. Opening of accounts by large numbers of people may help the government transfer subsidies directly to account holders. But the fundamental problem of the poor people is poverty — lack of income to sustain their lives. This problem will not be helped. Indeed, this linking with the banking system may, rather, increase the plight of the poor.
Prime Minister Modi believes farmers are committing suicide because they did not have access to credit from the banking system. That is far from the truth. The real problem is that prices of goods produced by the poor are low. Bank accounts can be helpful only if one has some savings to put here. In the absence of income, bank account or no bank account, the poor will remain poor.
I was doing some social work in a slum in Bengaluru years ago. The local moneylender was charging an interest of Rs 1.25 for a petty loan of Rs 20, and the multiples thereof, for a week. This translates into a whopping rate of 325 percent per annum. So, I organized a money lending cooperative. I got the people to contribute Rs 10 each to create a capital, I contributed Rs 500, and we started with a capital of Rs 1,000. The cooperative charged an interest of 80 paise per week against Rs 1.25 charged by the moneylender. The borrowers were mighty happy. Soon, the capital grew to Rs 4,000. But then some borrowers would simply not repay the money. More importantly, they went back to the moneylender and took more loans over and above those taken from the cooperative. In the end, we found that the people had gotten mired deeper in debt. The fundamental problem was that they did not have income. So more credit only meant more debt and more interest burden. The fate of Jan Dhan will be no different. People will borrow the overdraft of Rs 5000 permitted under the scheme and that will be the end of it. They will not be able to reply this and ultimately have to pay interest on this. They will be poorer by the day’s end.
I made another attempt to increase the income of the slum people. Many families were buying tin sheets and making kerosene pumps out of them. So I contacted a tin sheet company and bought the tin sheets in bulk and provided these to the slum people at lower rates. They were mighty happy. But then some of the hard-pressed members started selling the pumps at lower rates to the shops. They could afford to sell cheap because they were getting tin sheets at a lower price. Soon the price of the pumps declined in the market. The income of the slum people remained where it was. The benefit of cheap tin sheets went to the buyers of the pumps! The message is that supply side strategies do not work. Increased supply leads to lowering of prices in the market and the producer is left no better off. The correct solution is to increase demand for the products made by the poor. Increased demand for the pumps would have gotten them higher incomes. Cheaper tin sheets got them nothing.
PM Modi is following the supply side approach that is doomed to fail. In his Independence Day address, Modi said farmers were committing suicides because they did not have access to loans from the banks. Sorry. Farmers are committing suicide because prices of agricultural produce are kept low by the government to keep the urban middle class happy. Agriculture has become a loss-making proposition. Farmers are incurring losses, are not able to pay debt, and are committing suicide. It makes little difference whether they are in debt to a bank or the moneylender.
Actually, the formal banking system is a huge funnel that siphons away the savings of the rural people and provides the money to the urban borrowers. The Credit-Deposit ratio of most rural banks is between 10-25 per cent. These have become collectors of the surplus money from the village. The money is sent to the head offices of the banks wherefrom it goes to the big borrowers. The rural areas are flush with money. The rural people are deploying this money at abysmally low rates of interest of around 5-7 per cent in fixed deposits, instead of deploying it in income-generating activities because the government is not able to create any income-generating activity in the village. Village-based professions have been killed by big companies. Bottled soft drinks are selling instead of buttermilk; plastic containers are selling instead of earthen pots; plastic furniture is selling instead of wooden chairs and so on.
The one and only problem of the poor and the farmers is low prices of their produce; and fierce competition from automatic machines. Modi should solve these problems instead of providing yet another pathway for channeling their savings to the cities.
Another problem with the Jan Dhan Yojana is that the requirements of providing proof of identity and address have been waived by the banks. This is welcome insofar as many poor persons who did not have adequate documents are able to open accounts. However, this window, it appears, has been used by unscrupulous elements to open accounts under fake names. A problem faced by those indulging in No 2 business is that they cannot put their money in the bank accounts or invest it in share markets or real estate. Income Tax officials may seek details of the source of income of these deposits. One way of circumventing this problem is to open accounts in the names of persons who do not exist. One could deposit black money in these fake accounts and thereby convert black money into white. It was difficult to open such fake accounts earlier because banks demanded proof of identity and address before opening the account. This requirement of providing proof of identity was waived for the Jan Dhan Yojana. It is suspected that a large number of fake accounts have been opened in the process. The government should ask the banks to undertake a security check of all accounts opened under the Jan Dhan Yojana so that such misuse of a good scheme is prevented.
The writer is a former Professor of Economics at IIM Bengaluru
