NEW DELHI (Reuters) - Prime Minister Narendra Modi promised on Thursday to end “financial untouchability” with a scheme to ensure the majority of households in his country of nearly 1.3 billion people has a bank account within months.
If successful, the scheme could help mend strained state finances by better targeting billions of dollars in welfare spending as well as relieving poverty in a country where about 40 percent of the population has no access to banking.
“Mahatma Gandhi tried to end untouchability in the society,” Modi said, referring to modern India’s founding father and his drive to stamp out bias based on the traditional caste system.
“If we want to eradicate poverty, we need to get rid of financial untouchability,” he said.
“If forty percent of Indians are not a part of the economy, how can we be successful in eradicating poverty?” Modi asked.
The government said nearly 15 million people opened accounts at centres around the country on the first day of the programme. The goal is to open 75 million accounts by January next year.
The campaign to bring the masses closer to the financial system could improve measurements of economic growth and bolster Modi’s popularity among the poor.
Under the scheme, the government will give account holders a debit card and accident insurance cover of up to 100,000 rupees ($1,654). Good customers would also be eligible for an overdraft facility of up to 5,000 Indian rupees after six months.
Earlier this month, Raghuram Rajan, governor of the Reserve Bank of India, said bank profitability was crucial for the success of the scheme, which could help break a link between poor public services and corruption.
Some critics fear the overdraft facility could end up swelling bad loans at banks as it does not spell out how the banks can collect debts.
Bad loans at Indian banks rose to 4.1 percent of gross advances in March from 2.4 percent in March three years ago, the RBI said in its annual report last week. Restructured loans, meanwhile, rose to 5.9 percent of gross advances in March from 2.5 percent in June 2011.
The debit cards use the state-run RuPay payment system, designed as an alternative to Visa and MasterCard. Modi, whose Hindu nationalist ideology emphasizes Indian pride, wants the indigenous system to be accepted globally.
“We know about the popular Visa cards … should we not have the intention that our RuPay card works in any country globally?” he said.
The launch of the Jan Dhan Yojana (Scheme for People’s Wealth) came weeks after Modi blocked a global trade deal, saying it threatened the interests of poor farmers.
One reason cited for India’s opposition to the trade deal was that it could limit the country’s room to provide subsidized food grain. That problem could be side-stepped by a shift to cash transfers of welfare payments, made possible by bringing farmers into the banking system.
Such targeted welfare programmes have been credited with poverty reduction in several Latin American nations.
By paying benefits directly into bank accounts, the scheme could cut waste and corruption that inflate India’s $43 billion subsidy bill, equivalent to more than 2 percent of its GDP, for handouts of grain, fuel and fertiliser.
The push for greater financial inclusion would also diminish the influence of moneylenders and other informal financing channels that operate outside the ambit of the Reserve Bank of India (RBI), blunting its monetary policy tools.
The drive for universal banking access is not new but the failure to provide services tailored for the poor and low-income groups has kept India way off its goal.
Many accounts opened in the past lay idle, an issue the government hopes to overcome by using them for subsidy payments.
While not all areas in the country are close to formal banks, new rules allowing mobile phone companies and other companies to act as banks could help leapfrog such infrastructure deficiencies.
Additional reporting by Aditya Kalra; Writing by Frank Jack Daniel; Editing by Tom Heneghan