Wondering About Jan-Dhan Accounts? Find Out Here…
Aug 21, 2017

Author: PersonalFN Content & Research Team

Public Sector Banks (PSBs) are in a catch-22 situation. They are feeling the heat of Non-Performing Assets (NPAs), which run in high double digits (for some of them). Their profitability has come under severe pressure. And, ironically, to show improvements on these accounts, they are forced to take greater risks.

PSBs have played a major role in the successful implementation of Pradhan Mantri Jan Dhan Yojana that aimed at financial inclusion as the social objective. However, bankers complain these accounts are currently unprofitable for them. According to Mr R.K Takkar, MD and CEO, UCO Bank said, “Once the average balance in Jan Dhan accounts is 5,000-10,000, they will become a viable business proposition. At present, the average balance is around 2,500.”

 “The social objective of the Jan Dhan Yojana has been fulfilled, and a lot of government schemes are also getting routed through the accounts. But unless we can credit-link the accounts, they are just adding to the additional cost for banks. Banks are now pushing for credit linkage but are facing tough competition from entities like micro finance institutions”, an executive of another public sector bank told media on the condition of anonymity. 

Bankers are worried about the creditworthiness of Jan Dhan account holders. And that’s the trouble as you can see in the chart below.
Beneficiaries at
rural/semi-urban centre
bank branches
Beneficiaries at
urban/metro centre
bank branches
Balance in
beneficiary accounts
Public Sector Bank 23.76 12.98 10.78 52,086.0
Regional Rural Bank 4.77 4.05 0.72 11,561.3
Private Banks 0.95 0.58 0.37 2,050.2
Total 29.48 17.61 11.87 65,697.6
All figures in crore
Data as on August 09, 2017
(Source: Pradhan Mantri Jan Dhan Yojana Account)

At present, only about 15% of Jan Dhan accounts enjoy the credit facility. During demonetisation, the balance in Jan Dhan accounts had reached Rs 74,000 crores. However, as the process of remonetisation gathered pace, nearly Rs 8,300 crores were pulled out from these accounts. As a result, extending the overdraft facilities to more accounts created a big challenge.

While what banks claim about the profitability of these accounts might be true, their concerns for risks appear to be exaggerated. In the past, banks have brazenly sanctioned corporate loans, that turned into bad debts, hence denting their profitability margin. The same banks had allowed big corporate lenders to dictate terms of loan restructuring, despite being defaulters, in fact, willful defaulters in some cases.

Doesn’t it seem as if banks are making taxpayers bail them out for such deliberate miscalculations? They have missed a number of opportunities to raise capital.

If that wasn’t enough, some banks seem to have started punishing other account holders/depositors by passing on the costs associated with demonetisation and the Jan Dhan account scheme. It won’t be surprising if these depositors are annoyed with this unfair treatment and opt to take their business to other private sector banks——-it could be a double whammy for PSBs.

Are they turning penny-wise and pound-foolish? Perhaps, yes.

Finally, let’s assess out how sound the guidelines to sanction overdraft facilities to Jan Dhan accounts are:

Eligibility criteria
  • BSBD (Basic Savings Bank Deposit) accounts, which are operated satisfactorily for at least six months
  • OD to be granted to the earning member of the family, preferably women of the house.
  • • There should be regular credits under DBT/ DBTL (Direct Benefit Transfer-LPG) scheme/other verifiable sources
  • Account should be seeded with Aadhaar for avoiding duplicate benefit
  • BSBD account holder should not maintain any other SB (Savings Bank) account with any Bank/branch, to ensure compliance with RBI directives.
  • Age of applicant between 18 years to 60 years

(Not eligible: Minors, KCC/GCC borrowers, more than one member of the same family)

Nature of facility: Running OD facility in SB account

Period of Sanction: 36 Months subject to annual review of account

The maximum overdraft facility that can be granted is the lowest of following:
  • 4 times the average monthly balance
  • 50% of credit summations in account during the preceding 6 months
  • Rs 5000/- whichever is lower

Security: Nil

Interest rate: 2% above base rate, not exceeding 12%.

It appears the Government has taken adequate measures to minimise the credit risk associated with Jan Dhan Accounts while promoting the credit inclusion of the weaker sections of society.

Interest structure, eligibility, and the existing relationship of banks with account holders offer them an edge over other micro-finance lending institutions.

Nonetheless, it’s high time for the Government to take a call on the main issues such as the merger of PSBs and perhaps their denationalisation.

Why complain about Jan Dhan account holders, when there is no record of high slippages so far?

Are PSBs crying wolf or are their apprehensions justified?

Well at this juncture, as far as Jan Dhan accounts are concerned, the banks’ worries certainly look overstated. There are too many areas wherein they need to work immensely hard to improve their profitability and maintain market share.

In a capital starved country like India, the financial health of banking institutions that command 70% market share collectively is fragile. Not a good sign at all—especially considering we are aiming for growth above 8% in the future.

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