Sucheta Dalal :Banks and financial literacy: Ears to the ground
Sucheta Dalal

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Banks and financial literacy: Ears to the ground  

July 21, 2011

Banks are fleecing taxpayers and giving out doles

Sucheta Dalal

It is over a year since the Customer Service Committee, headed by M Damodaran called for public suggestions but there is no sign of the report being released. Even Committee members admit with frustration that they are clueless about the cause of delay, when they have signed the report several weeks ago.Comprehensive action on customer service issues will only emanate from an open discussion of the report’s recommendations.

What we do know is this: banks are quietly making plans for unique identification numbers (UINs) to be a mandatory part of know your customer (KYC) requirements without consulting the consumers or looking into privacy issues. This is against the Unique Identification Authority’s original claim that the biometric numbers will not be mandatory. Examining this issue is important because biometrics identification has not been a solution to beating either the literacy problem or identity issue so far. NGOs who worked with biometric ATMs installed with much fanfare a few years ago, say they are a nightmare for users because fingerprints of people who work with their hands and with chemicals and detergents are too blurred for the machines to recognise.

No-frills accounts, which were to boost financial inclusion, are another non-starter. Banks and the ‘State of the Sector Report’ reveal that at least 80% to 97% of no-frills accounts are inactive. Yet, even the urban poor find it difficult to open bank accounts. Has the RBI or the Damodaran Committee examined the problem? Moneylife Foundation, our NGO associate, finds that poor financial awareness is the key problem. Merely recruiting NGOs as banking correspondents is not the answer. Many of them quickly turn into micro-financiers and push people into debt or sell them insurance policies for fat commissions. The suggestion that no-frills accounts have an overdraft facility (in other words, a disguised loan mela) is also ridiculous. Smart farmers have already turned hugely subsidised 7% agriculture loans into an arbitrage opportunity by depositing the borrowing in bank fixed deposits at 9% or more. Some are even being lured by dubious realty companies offering 19%-21% interest. If they fail to repay, these greedy farmers would have sunk into a nice debt trap. The answer to this is serious financial literacy. It explains why banks are safer than unstable but friendly ‘path peedis’. Forcing payments under the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) through bank accounts also leads to a one-time transaction. The RBI needs to be genuinely interested in engaging with people to take financial literacy to the masses; it cannot be done by fiat and setting targets.

It is important to remember that all these giveaways and experiments forced on banks—which are all listed entities—come at the cost of taxpayers or investors. The money wasted in non-productive accounts or micro-overdrafts can never be recovered. Skoch Development Foundation, a powerful lobbying group based in Delhi, says that these amounts are minuscule compared to what banks spend on advertising. But advertising brings fresh business, not losses, while giveaways end up being paid out of taxpayers’ money in the form of re-capitalisation of banks. It’s time we demand some account of the money that banks are forced to spend on ill-considered giveaways.

-- Sucheta Dalal