Selling JanDhan to the rich

The article talks about how the idea of "Jan Dhan" has been repurposed by SBI in a product called SBI YONO which has all the negatives of the scheme and none of the positives. JanDhan accounts cannot be charged penalty for having low balances. The article will show you how YONO and Jandhan are same at their base, but one has been branded differently and being sold differently to get around the penalty provision.

The article also suggests that banks like SBI are increasingly making penalty from Monthly Average Balance (MAB) as a tool to boost profits at the cost of poorest of the poor. It further says that SBI YONO is one such attempt to lure more people into opening new accounts so that the base of people with "MAB chargeable accounts" grow.

Introduction

One of the focus areas for the present government was financial inclusion, and after coming to power, one of the first steps that Government did was to bring in the much touted PMJDY (Pradhan Mantri JanDhan account Yojana). This was in 2014.

This was supported by various policy changes via RBI circulars which also enabled banks to create special officers and banking centers called Business Correspondents (BC's) and Branchless Rural Banking outlets.

A quick overview of bank account numbers in India

The number of bank accounts in the country grew on steroids. For instance look at the report from ministry of finance below

RBI already had a framework called Basic Savings Bank Deposit (BSBD) in place which was initiated in 2005. The JanDhan yojana was deemed as a kind of account under this and the number of BSBD numbers also grew to an unprecedented level.

You have to understand that for basic banking, a person has to be an Adult and a Literate, and if you look at the number of accounts, it's literally approaching this cap.

But this growth brought in a slew of problems. For that you have to see the structure and offerings of JanDhan accounts (From PMJDY)

The point to be noted above is the PMJDY accounts cannot have a minimum balance requirement.

This was in 2014-15.

This was the time, when aadhar hadn't reached the same penetration that it has today. To make aadhar reach everyone, government had to bring in a lot of changes and attach it as a requirement for availing subsidies and getting utilities.

The Small savings bank account or "Small Account"

So to counter that, RBI brought in a special kind of account called "Small Savings Bank account" or "Small Account" in August of 2014. This allowed for people to open bank accounts with literally no proof except their signed photograph and that was about it.

These accounts had the limitation that the account was only valid for One year from opening and one additional year if the person was able to prove that he/she has applied for an identity proof which hasnt come in yet.

Managing 500 Million bank accounts is not easy.

So the banking sector grumbled, but kept going. But the government also started pushing on the Non-Performing Assets (NPA) front. Now this was a clincher.

Till now the banks had a lot of autonomy on operations level and on loan disbursement. But NPA meant that a section of loans were going to be classified as bad debts.

This meant that the banks had to quickly come up with a way to offset the cost of managing JanDhan accounts and the money being kept aside to deal with NPA.

In comes the Monthly Average Balance penalty (MAB)

Instead of coming up with new products, banks did what most kings across the world did. Increase taxes. This was in the form of charges on not keeping a minimum average balance (MAB) in accounts. SBI announced it somewhere in Mar 2017 and other banks followed suit. The initial penalty was set as 600 rupees for not maintaining a balance of 5,000 Rupees.

You have to see that the concept of MAB is selective taxation based on your savings level, which is dependent on your income level. This is as close as we get to taxing the poor for being poor.

This meant that now banks could relax and wait for this money to trickle in. But RBI is not one of the agencies to let go of targets that easily.

In May 2017, RBI brought in an interesting circular, that asked banks to open 25% of their branches in denoted Rural areas in any given year. If banks failed to achieve this, then they would lose the license to open new branches in Tier 1 cities.

Dang. Rural bank branches mean more losses.

MAB: the new money maker

See the way banks are built is that they make money on the deposits that are being made. A minimum balance cannot be implemented region wise, and will always follow the common minimum denominator from across the nation.

This means that with MAB, banks are not actually getting any substantial income by deploying it as loans and charging interest on those loans. The MAB penalty (600 INR if your balance falls below 5,000, which is now revised to 3,000) was lowest, coming at 120% a year if you had say 4,999 rupees in your account. The penalty percentage grew more and more as your balance dropped.

At present policy on a balance of 3,000 Rupees, if you are charged a penalty of 500 Rupees, that's like charging an interest of 16.5% per month and 200% a year. Banking has become the most expensive necessary subscription service overnight.

So can you see that if you have 100 rupees of money, will you want to do paper work, insurance and commision to lend it out at 15% a year with the risk of it turning NPA? or roll out a policy and just move the money from customers account into your own at 120% a year rate?

August 2018 figures show that the Indian banks raked in 5000 Cr(700 Million) in MAB penalty fines. 2,500 Cr of this was raked in by SBI alone. Compare this number with the Q4 2017 profits for SBI which stood at 2,800 Cr and the latest Q4 for 2018 is at a loss of 7,700 Cr.

Ofcourse banks chose MAB as a source of income.

Meanwhile, the first of fines had started trickling in under the MAB penalty and Arundhati Bhattacharya stepped down from the chairmanship of SBI in October 2017.

A revolutionary new product is launched - The SBI YONO

Suddenly in November 2017, SBI brought in a revolutionary lifestyle and banking product called YONO.

Now you see, when government companies launch something new and which is touted as revolutionary, i always like to take a peek if actually it is.

YONO is a new banking platform that facilitates easy account opening and management.

This is what YONO does.

It has two kinds of accounts, (1) A normal savings account (2) An insta savings account

The insta savings account had some awesome features like you don't need to visit a bank branch. Details are below. In my head i was sure that this is a payments bank account.

But no, a little digging done and you will find that you could receive money in it and do NEFT transfers.Exactly as in JanDhan Accounts.

And then i read, that the account was only valid for ONE YEAR on which you had to go to the nearest bank home branch, do a biometric KYC and convert it into a normal Savings account. Exactly like "Small Accounts" under the JanDhan Scheme.

Also, there was MAB requirement and penalty on it.Which is explicitly prohibited for JanDhan Accounts.

Seems familiar?

Yep, A small savings bank account brought in to facilitate the JanDhan scheme was very smartly your new lifestyle and banking platform. It had all the limitations of the JanDhan account, and none of the advantages. It had the MAB penalty on it.

See, new breakthrough products in banking industry are hard to launch because of the huge amount of effort that goes in to get a permission. So its understood that you would want to play with the hand you are dealt. Banking is a profit making entity.

But turning around provisions that were made for public good and selling it as the account of choice for the new millennial is just a tad too much. Notice the clause that the person should not have existing relationship with SBI?

Now we wouldn't want existing customers to have an MAB free account till Jun 219, would we?

So who is it aimed at? Of course the students and the first job working professionals. Who have access to technology and smartphone to sign up quickly, and forget that the fines will kick in from July 2019.

SBI has gone on record claiming that the target for these accounts is 250 million accounts. So you can see a lot of push coming its way. And why not. These are accounts which are more expensive than a credit card, and have already shown that they can add a quarter worth of profits to the bank's baseline.

Conclusion

Anyways, the entire point of this article is that there are many things that businesses do to grow, but something like this hits hard at the base of public good.

The JanDhan accounts were brought in to solve something. It's easy to see how with this product, aggressive sales teams will push PMJD down and replace it with an INSTA account which can be opened on the roadside.

People can be signed on to an insta account quickly and soon start raking in penalty in MAB fees and feel like losers to trust in banks.

And banks put in effort to build these products. The requirement for PMJD and insta accounts is exactly the same, except that Insta Account is a money maker for the banks and PMJD is not. Also SBI being a public sector bank has enjoyed quite a monopoly because of government support. It has never had to worry about profits in its years of existence. As a public sector bank, its expected that the social good would be at the heart of the enterprise. But sadly, that seems to be changing faster than we can adapt.

-----------------------------------------------------------------------------------------------------

Disclaimer: The views expressed in this article are my own and not representative of any of my employers, present or past.

Thanks

Satyarth