NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, July 16, 2014

The Modi-government has somewhat bought the idea of universal bank accounts, something first proposed by the Nachiket Mor panel in January, 2014. The plan will finally come up with a little bit of ’Modi’-fication. Instead of one full service bank account for every adult citizen by January 2016—the idea proposed by the Mor panel—the government plans to offer two bank account for every household within the next year.

This will probably be followed by a second phase, where the remaining citizens of the households will be covered over a period of next 2-3 years.The scheme will be announced on independence day as the flagship financial inclusion mission of the BJP government.

The government will execute the plan using the business correspondent (BC) network of state-run banks to reach out to the un-banked. According to a report in the Times of India, the Modi government plans to open 15 crore accounts with overdraft facility of Rs 5,000 in each account, which would mean that the state-run banks will end up issuing overdraft facility of around Rs 75,000 crore to fresh account holders with no credit history, apart from extending accident insurance of Rs1 lakh—a high risk to the banks.

There will be two key differences with the Aadhaar-linked universal bank account plan of Mor and the BJP-promoted financial inclusion plan. First, the latter will have more reliance on the data sourced from the National Population Register to fulfil KYC purposes, along with Aadhaar, instead of the Aadhaar-linked model proposed by Mor. Second, the burden of implementation will fully rest with public sector banks.

Why not Aadhaar? Beyond the obvious reluctance to embrace UPA’s flagship programme, there could be one other factor that concerns the BJP government—chances of illegal immigrants from Bangladesh getting the legal sanctity of a national registry by virtue of obtaining an Aadhaar number. Part of this exercise could be a possible examination of the information pool of those who have already enrolled under Aadhaar in certain geographies to see that the enrollment process is kosher.