The bit about bank revenues might be a telltale sign of where the real interest is, while the part about paying subsidies directly avoiding middle-men corruption makes the plan look more promising.
Whatever the way you look at it, 15 million people suddenly enrolled into the bank system are a huge market for some kind of startup that does not exist yet.
I have some experience in this space. A decade ago, I led a talented team to design the largest (at that time) satellite-based network to expand India's largest bank (it was not then) to rural india.
The government, via Reserve Bank of India, earmarks specific sectors, in line with their current policy, as "priority sector". This can be housing, agriculture, rural electrification, etc. And banks are mandated to increase their focus and show metrics that prove they are engaging bona fide with the "priority sector". Rural banking is one such.
The cash deposits and reserves from these customers, broadly speaking, are not that much. They tend to be big in Gold Loans and a source of Agriculture / Animal Husbandry loans.
> The cash deposits and reserves from these customers, broadly speaking, are not that much.
Indeed the deposits by the very poor aren't much. But this is a government scheme targeted at enabling the poor, not to help the banks.
My mom once mentioned, how nice it was when my parents first got a bank account. They started saving. Money became easier manage. To enable 15Mn people to have bank accounts is a good step.
Finally mobile payments, Airtel money and the likes, that require phone number to be attached to a bank account would start to work for more and more of the poor. In a country where banking infrastructure, especially for transfers, isnt that great and mobile penetration is really high, such an initiative would prove to be a great boon for direct transfers and even possibly overeas charitable remittances in which money could be transferred straight to the needy, creating full transparency!
FWIW - India has one of the best money transfer infrastructures [IMPS/NEFT/RTGS]. IMPS is my favourite - it taps into the ATM machine backbone and enables 24x7 instant payments at almost zero cost [ http://en.wikipedia.org/wiki/Immediate_Payment_Service ]. The problem is more than the lack of infrastructure - Most folks are a bit apprehensive about using Cards or Online banking capabilities for fear of theft.
> Reserve Bank of India Governor Raghuram Rajan this month urged the government to directly transfer cash to the poor instead of offering them public services
That sounds like a terrible idea. This opens up the door for further extortion, corruption and exploitation of the masses. Say the government hands out $15 per child for education, there way to prevent debt collectors to harass the poor into paying that money to them. Plus, the extorter knows he can collect at least $15 per child!
I think offering a service instead of "free money" is much more valuable.
This is what people tend to assume, but it based more on emotion than reason. Conditional cash transfers have been very successful in places like Brazil. There a few good articles about it in the Economist. Here's one: http://www.economist.com/node/16693323
Are you saying that we shouldn't give money to the poor because if they had money they would be robbed? By that logic banks shouldn't have ATMs becuase people get mugged after going to ATMs.
We should give money to the poor so they can not be poor. Even if 10% of them get robbed, even then 90% will be better off than before the money transfer.
Services are nice but central planning of services provides worse allocation than well functioning markets. Even for the poor.
It is modernity. For example, 1/3 of Americans are in debt (and have negative money) but I would call them wealthier and better off then the poor in India who have a few rupees in their wallets.
Poor people in the US don't have credit cards. They don't even generally have bank accounts, but enough of them do that I ignored that fact for the sake of discussion.
No, this is wrong. The real tragedy is that poor people do have credit cards. The credit card system overwhelmingly favors those at the top -- people who automatically pay off their balances each month and enjoy 30-day interest free loans the rest of the time, versus people at the bottom who have a perpetual negative balance on their cards and who pay exorbitant interest rates that would be illegal in a civilized country.
Are you sure about this? I agree homeless people don't have credit cards, but I see the poorest people still have (multiple) credit cards. Maybe I'm not looking at the right places in the US?
This is for poor and labor class people.
Currently these people earn hand to mouth and spend daily as per their need. Husbands spend on drinking and there is no money left for medicines or child care.
If they get bank accounts
1)They will start saving.
2)They will understand the benefits of saving and be the owners of their own money.
3)Any govt schemes or benefits will directly reach them which currently is going into the pockets of corrupt middle men.
$)Banks wont give credit or loans to these people without colatteral so no question of debts.
This way it will start a revolution and it will take some time to see the actual benefits but I am sure it will be very positive.
Err, thats a very old school thought. Its more that these people don't believe in banks or the banking system. In-fact most of rural India still has people taking loans from 'zamindars' who end up charging insane interest rates and forcefully taking away property/farms from the poor farmers.
Not quite true. I connected to my village and and spend around two months there every year.
1. The Zamaindari (Zamin = Land ZaminDar = Big Land Owner ZaminDari = A system of exploitation set-up by British now dismantled.) system is over. Period. There are some big land wonders left but I am not going into it.
2. Poor borrow from money lenders who may or may not be big land owners. But in almost all the cases these money lenders are local muscle men, like everywhere else in the world. This is how parallel money lending works all over the world. The local moneylender lends money. Charges exorbitant rates. In case of non payment the life is made hell for the debtor. In many cases the debtor borrows money and spends it on gambling and alcohol and ends up loosing all his wealth to the money lender. BTW the money lender also accepts deposits. But they don't usually pay interest on the deposits. Many times these deposits work in an interesting way - what is called a "committee" in some parts of the country. Lets say there are 1000 contributors in the "committee" each depositing Rs 500 every month. Let's say duration of the committee is 2 years. Each month a lottery is conducted with one winner. The winner gets Rs 24 x 500 = 12,000 and stops contributing. The remaining members keep contributing. At the end of 24 months each remaining member gets 12,000 each. If a member misses a payment his/her contribution till date is forfeited. These moneylenders also accept deposits for safekeeping. Usually no interest is paid. Government's scheme plans to break this.
3. Government owned banks lend billions of Rupees every year to poor farmers and other economically/socially weaker sections. These loans were usually waived off by the Central (Federal) government. Populism over economics.
4. Opening of bank accounts is first step towards financial inclusion.
5. The number 15 million should be taken with a pinch of salt. Some banks like Bank Of Baroda were opening zero balance accounts and many who already had accounts opened another one with such banks. Branches were given targets and many opened accounts for family and friends who already had bank accounts.
Ah yes my bad, I mislabeled the money lender people as zamindars. Thats just the old school name. I do agree with most of what you have to say, and guess its a good thing with all the bank accounts opening. It should somewhat curb the absolute chaos the rural India economy is in.
The thing you talk about are also knows as BC (or the link) and its quite common even in metros. There is also a variation of it run by jewellers (and gold traders) where one pays a fixed amount every month which is invested in gold.
If you don't mind me asking, which village? My roots are from a small town in UP which I have only visited once. But I am deeply intrigued by rural India and it always blows my mind when I realize most of the country's population is in rural India.
I think knowing that at the end of the month you are going to have some money (in bank) is a revolutionary change. It converts your own perception of being a day-labor to a salaried person without actually doing much. Whether it brings positive change or negative is still to be seen but a change in perception of self is definitely a drastic step towards removing poverty.
Exactly - this is devolution [1], in a money==power kind of argument. By giving money with no questions asked to an individual on an account with very few restrictions and fees (these banks are publicly run, not private), and increasing the ability for the poor to pay each other, you have devolved power to them and away from corrupt middle-men.
Not to mention these people will not have to deal with the loan sharks and their huge loan interest rates. Besides, this scheme is not just a bank account but also includes debit cards, which should help people against problems of keeping all their money in cash on them at all times, and an insurance, in most of India agriculture is dependent on the monsoon and mainly by this there is a big problem of farmer suicides in the past.
1. They will start saving: No. They won't. They will have what little money they have put into a system outside of their control and systematically syphoned away.
2. The benefits of saving are not something people need to learn; the benefits of saving money are harder to justify to someone who isn't already wholly dependant on it (and maybe even perceives it as a tool used against his people for centuries).
3. True, but I fail to see a major difference between a government and corrupt middle men. Most government people run businesses, is that the same in India? Conflict of interest?
4. The 2000's called...give it a couple years and whatever legislation you think protects the poor will be watered down, eroded away, or completely worked around.
The textbook justifications for predatory capitalism don't work anymore. I'm sorry, but the more involved the poor are in finance, the more they are preyed upon; because there is opportunity and reward. Taking candy from a baby.
I grew up in rural India, where banks were non-existent. People kept the money locked up in houses or worse yet, lent to the local money lender, who may or may not pay on demand. The government in those days introduced postal savings plan, which helped people greatly. That was my introduction to banking as well. Here are some observations:
1. Banks were inaccessible to poor people. Too much paper work. Too far away. Too difficult to conduct business. I hope with new bank accounts all these are changing too.
2. Saving is not new. People save money; even poor people do save. But, then, if the savings are in women's hands, it is spent more wisely. Historically, the only way women could store the money was in gold. Eventually, gold itself because such a coveted possession, it's monetary value was not exploited for capital needs. Bank accounts may not have these problems.
3. Historically, the only reason rural folks went to bank is to take loans, under some government project. And, that had a big potential for corruption. People had to pay money to take the loans. The funny thing was the underlying assumption is that the borrowers need not pay money back, since the government will write it off, for some election purposes.
4. Money transfers for poor is new. I think that would work lot better. And, perhaps giving to women would make it work whole lot better. In my observation, there is lot of social and cultural conditioning in seeing the kids doing better than the parents, the mothers will try to put the money to use. Whether they have the financial education or not, different issue.
5. Any system will be exploited over time. I think it is important to shake them up every few years to disturb the existing power structures, especially in the relationship between the government and the people.
You should understand that most of the banks that opened these accounts are Public sector banks (or Government Banks). And most of these accounts have no minimum balance requirements and not many surprise charges. And deposits in Government banks are guaranteed (insured upto a certain amount). So there is no question of the money getting siphoned off.
Totally agree... also.. government run banks make it difficult to get loans than private banks.. and even to this date older people tend to stay away from private banks because of hidden charges and surprises.
So you are saying the government is going through all these troubles to hand over subsidies and benefits to the poor only to "syphon" it away?
You are forgetting people are being saved from the clutches of money lenders which have enslaved these people for a long time now. Now the poor have the opportunity to get a loan from the bank and a real insurance cover. This change can not be trivialized.
+1 for moving away from the clutches of money lenders.
Though, the situation isn't that simple. Money lenders often accept undeclared assets as collateral. So for some people (the uneducated or the unscrupulous) money lenders are a boon, not a clutch.
