The Modi government’s budget did not create any stir for Indian business people as it did not contain any reforms which many people had expected. To some of the economists and business leaders who as his campaign cheerleaders dared to dream of a Thatcherite revolution, he seems not to be listening. Three months after his win, it is dawning on them that their views count for little.

“As of now, the momentum is lost. They might still recover it, but we have lost the moment,” said Bibek Debroy, a prominent economist who co-wrote a book laying out a reform agenda that the new prime minister himself launched in June. Debroy told Reuters that so far there had been no signs of the promised change at institutions sapped by graft and over-regulation that many Indians have grown to revile.

To be fair, the government has a five-year term to achieve Modi’s goal of transforming India into an economic and military power able to withstand the rise of China on its doorstep.

Given the above background, the Modi government wants to restore its reformative image to people of the country by launching an ambitious programme to give every household in the country access to bank account and other financial services, calling the initiative an important step to “fulfilling the aspirations of the poor”

The Prime Minister reportedly said: “When a person opens a bank account, he joins the economic mainstream, just as Mahatma Gandhi eliminated untouchability, making all Indians beneficiaries of this programme can ensure the elimination of financial untouchability.”

The initiative aims to provide at least one bank account for each Indian household, along with a debit card. Mr. Modi said his goal is to open 75 million accounts by January, which he said would provide nearly every household with an account. He said more than 15 million accounts were opened Thursday, as banks across the country held enrollment drives.

Roughly 35% of India’s 1.2 billion people have bank accounts, according to the World Bank, compared with 56% in Brazil and 64% in China. Just over a fifth of Indian adults saved any money in 2011, and only half of those kept it at a financial institution.
The potential benefits of increasing these figures are vast. Needy households, farmers and small-business operators would be protected from local loan sharks who supply unregulated credit in slums and villages. National savings also would be bolstered at a time when the country needs investment.

More widespread use of bank accounts would also make it easier for the government to pay welfare benefits directly to households instead of offering them as subsidized food or guaranteed employment. That could save billions of dollars lost to waste, theft and mismanagement.

But there are risks. Instructing beleaguered state-owned banks to serve more poor customers and operate in remote areas of the country could add a fresh strain to their balance sheets. Distressed loans currently make up around a tenth of assets in the country’s largely state-run banking system.

The bank accounts being offered under the new government program allow overdrafts of 5,000 rupees, or about $80, in effect short-term loans for people who withdraw more money than they have in the account. Each account holder also gets accident insurance.
The head of India’s central bank has expressed concern about the excessive indebtedness that can result when loans are extended to customers with low financial literacy.

In an interview with The Wall Street Journal, Reserve Bank of India Gov. Raghuram Rajan said providing cheap credit shouldn’t be the “first line of attack” in boosting economic opportunity. “It’s quite possible you get people who don’t know how to manage credit, how to manage their debt,” he said. “What we need to do is to follow a measured process.”

But Mr. Rajan has also acknowledged the importance of formal finance in thwarting usurers and corrupt officials who demand bribes or votes in exchange for food, jobs and medicine. Access to bank accounts “can break a link between poor public service, patronage and corruption that is growing more worrisome over time,” he said in a speech in Mumbai this month.

Financial inclusion isn’t a new project for India. When the country’s banks were nationalized in the late 1960s, they were all required to open rural branches. State-run banks still have to meet quotas on lending to “priority sectors” like agriculture and cottage industries.

More recent efforts have involved encouraging lenders to deliver services in novel ways. Since 2006, the central bank has permitted banks to employ local people to travel door-to-door to collect loan applications and handle small deposits and remittances. Banks have also been allowed to offer services on cellphones since 2008.

Despite these new ways to access financial services, many people don’t seem to be taking full advantage. Many new “accounts have been by and large inactive,” said Bindu Ananth, chairwoman of the IFMR Trust, which promotes financial-inclusion programs.

That is why Subir Gokarn, director of research at the Brookings Institution’s India office, said he believes Mr. Modi’s program contains a crucial innovation: The government is working to provide households not merely with a bank account, but also credit and insurance.

Critics of the government’s approach say the simplest way for India to broaden financial access would be to increase competition in the banking sector. Since the mid-1990s, the country has accepted applications for new banking licenses just once a decade. In the latest round, only two applicants were approved.

The RBI last month issued guidelines for licensing “payment banks,” or institutions that accept deposits and handle payments but can’t make loans and are instead required to invest their deposits in Indian government debt. The central bank’s hope is that nonbank financial firms, supermarkets and even the Indian postal service could start providing services to the unbanked people.

Barrister Harun ur Rashid, Former Bangladesh Ambassador to the UN, Geneva

(Dhaka Courier)