The way the Central government is pushing forward the social security agenda, it is very likely that the nation is moving towards an active role by the state in the sphere of personal finance of the citizens. The government’s policy and the people’s response to the PM’s call is aggressively eroding away the role of the various financial institutions in both public and the private sector; and this is never a welcome development in an economy that is expected to be market-driven.
The basic question before the government is, as I understand, how to reach the benefits of financial services to the hitherto deprived segment of the population.
The current trend indicates serving them various benefits on a platter and, often, at the cost of sound principles on which any business should function for creating value for the customers as well as for the other stake-holders. In a free economy, the government is expected to make law and regulations that facilitate accomplishment of such goals through business entities that generate economic activities for the larger socio-economic growth.
From the ramparts of the Red Fort, the Prime Minister announced on the 69th Independence Day that his flagship banking scheme Jan Dhan Yojana brought under the banking network more than 17 crore people. This is a great achievement as far as inclusive banking is concerned, but the fallout of such massive enrolment may adversely affect the viability of the banking system itself.
For a few months, the entire resources of the nationalised banks were engaged in pushing the government agenda forward. On the other hand, activities related on the advances front grossly declined, slowing down activities in the infrastructure front.
I even suspect that many accounts opened under Jan Dhan Yojana may lapse even without a single transaction. The ideal approach could be to encourage the banking system itself to draw strategies according to their respective strength and to work on a mass drive to enable people outside bank network to join the system on commercial line.
Similarly, the Pradhan Mantri Jeevan Jyoti Bima Yojana has been launched like a mela. I understand that this is a reaction to PM’s frustration over failure of insurers to reach out to the masses in the last 15 years. In spite of opening of the sector and a powerful regulatory mechanism in place, the life insurance industry, except the iconic job done by LIC, failed to fulfil its responsibility towards the growing and somewhat financially enabled rural and the urban poor or the lower middle class population.
However, financial and business propriety would require proper pricing of the product so that the scheme would be viable as per sound actuarial principles. Even though necessary statutory approvals have been taken by the insurers, the fact remains that the premium rate has been arbitrarily fixed. After deduction of the stamp duty charges for the sum assured of R2 lakh, the balance amount is further subjected to commission outgo. What remains would be having very thin margin for operating expenses and claims obligations.
The position becomes more fragile if the insurer opts for reinsurance cover. Both reinsurers and insurers are keeping their fingers crossed and waiting for the experience with the first-year’s business. In such a situation, the scheme may get derailed before it blooms or yet another avenue will open up to suck government’s development revenue into a non-productive subsidy. All such schemes, however lofty they may be, should not be launched in haste. Political considerations should not outweigh economic considerations when the financial commitments are on a very high scale.
The writer is advisor, GIC Re and former MD & CEO of SUD Life