The government wants to extricate the poor from the clutches of moneylenders. It has started the Jan Dhan Yojana to make banking services available to every citizen of the country. This will not be successful despite the good intentions. The Yojana will actually impoverish the poor by transferring their savings to the cities.
The poor people are being encouraged to park their savings in the banks under the Jan Dhan Yojana. Indeed, every citizen of the country must have access to banking services such as depositing, withdrawing or transferring money. Jan Dhan Yojana also provides a life insurance cover of Rs 30k and an accident cover of one lakh rupees. The account holder can also avail an overdraft facility of Rs 5,000. This facility can be availed, however, only if the account has been active. Large numbers of poor people have opened accounts to avail these facilities. The government reckons that the benefits that will accrue from the deposits made by the poor in their bank accounts will be more than the costs incurred in providing insurance cover and loans.
Making banking accessible by the poor is most welcome. However, this access to the banking sector does not ensure that benefits will accrue to the account holders. This can be explained by an example. The British rulers established a huge network of rail lines in India. They connected the hinterland to the ports. These rail lines were used to transport timber, indigo, cotton and other materials for exports to England. Trade flourished. But India became poorer by the day. The British buyers paid low prices for the goods exported from India and charged high prices for the goods imported by India. Increased connectivity thus became a curse for the country. Now, establishment of the rail network was not to blame. The problem lay with the politics of foreign trade. The economic framework within which trade took place was poised against India and the rail network became an instrument of impoverishing the country. The same rail network is now beneficial for the country. It is being used to promote trade and travel within the country. So the impact of the rail network depended upon the overall framework. If the framework was bad, rail would contribute to enhancing that bad.
The framework in which the banking system of the country operates is likewise poised against the poor and the rural areas. The system collects the savings from the rural areas and supplies the money to the metropolitan cities. As a result, the Jan Dhan Yojana will only lubricate the transfer of resources from the poor to the rich. Proof lies in the Credit-Deposit Ratio of the banks. If a bank has given loan of Rs 100 lakhs and collected deposits of Rs 50 lakhs then the Credit-Deposit Ratio is 2. A high Credit-Deposit Ratio means that the bank is bringing money from outside and providing to local people. A low Credit-Deposit Ratio means the bank is collecting money locally and supplying outside.
In rural Punjab, for example, the Credit-Deposit Ratio for rural areas was 61 percent. Say, a bank in rural Punjab collected deposit of Rs 100. It had to park about Rs 27 out of this in Government Securities as per Reserve Bank of India regulations. The bank was left with Rs 73 to lend. It lent only Rs 61 in the rural area. The balance Rs 12 was sent to the head office and from there to Chandigarh. Thus the Credit-Deposit Ratio for Chandigarh was 106. The banks, therefore, are working like a huge siphon.
The Jan Dhan Yojana will smoothen this transfer of resources from the rural to the urban areas. People in rural areas will get attracted by the benefits provided under the Yojana and put their money in the banks. The banks will then send that money to the urban areas. The Yojana provides an overdraft facility of Rs 5,000 to the account holder only if the account is “active”. The overdraft facility seems to provide more money to the people than deposited by them. An account holder may make his account “active” by depositing and withdrawing Rs 500 a few times. Then he can borrow Rs 5,000. It can be claimed that this will lead to flow of money from the urban areas to the rural areas. This is not exactly correct. The government has actually taken a calculated risk in the hope that more money will be deposited and less will be withdrawn through overdraft. Note also that the benefits of insurance cover to the account holders have been provided only for a period of five years. It will be reviewed thereafter. Perhaps, the government has calculated that people will develop the habit of depositing money in the banks in these five years. The long term benefits from the development of this habit will be more than the short run costs of giving out insurance claims.
The Jan Dhan Yojana takes on this negative complexion because there are fewer and fewer business opportunities for the poor by the day. Businesses such as handlooms, candle making, and bread and biscuit making have been totally taken over by big manufacturers. Therefore, the poor people do not have any reason to borrow from the bank; and the banks do not find the poor “bankable.” Most money borrowed is used for consumption purposes. A Village Pradhan told me that most borrowed money is being used to buy liquor. Some persons have used the money to build a pucca house. But no one has used the borrowed money for productive work, such as buying a tractor. Production by automatic machines is so much cheaper that small businesses simply cannot compete. Labour is becoming increasingly redundant.
The present flow of money from the poor to the rich can only be reversed if we reserve certain sectors for the small businesses; or impose heavy taxes on big industries. Heavy tax on large scale bread manufacture, for example, will enable smaller bread manufacturers to survive, that will generate demand for credit among them, and encourage the banking sector to serve them. Without such an enabling framework, the Jan Dhan Yojana will only establish one more route for transferring the wealth of the poor to the rich.
Author was formerly Professor of Economics at IIM Bengaluru