The decision to incentivise debit/credit card transactions may have far-reaching implications as high usage of cash has substantial costs
Budget FY16 has many positives for banks, especially the public sector ones. Some of these measures have both qualitative and quantitative benefits, with enormous potential to lift the discretionary spending of households that can have a multiplier impact on the economy.
Let me first begin with the implications of the Pradhan Mantri Jan Dhan Yojana (PMJDY). As on January 31, 2015, banks have crossed the target of opening 7.5 crore bank accounts by a huge margin, opening over 12.5 crore accounts, of which 36.5% (4.4 crore) have been seeded with Aadhaar numbers. Our estimates show that the 35 DBT schemes under PMJDY would bring deposits of R33,000 crore per annum and DBT-L (LPG), an additional R4,000 crore to the banks. Gross benefit to the banks would thus be nearly be R37,000 crore of deposits per annum.
Additionally, the overdraft limit to PMJDY accounts under priority sector lending (PSL) targets will incentivise the banks to offer more credit limits to these accounts. Our preliminary estimates reveal that nearly R25,000–30,000 crore of credit may be channelised to the active 12.5 crore PMJDY accounts opened by ASCBs as on January 31, 2015. Thus, a bonanza of R60,000 crore (0.6 of the GDP) awaits the banks!
The Budget proposed a simple gold deposit scheme (GDS) to mitigate the burgeoning gold demand. This scheme recognises that gold demand cannot be artificially curbed in the long run. It, therefore, seeks to introduce a delay between the time a buyer decides to buy gold with an investible surplus, and the time the metal is actually delivered to her. This time-difference can “financialise” gold savings on an on-going basis and can add significantly to banks’ deposits, credit and earnings. It can also build up FX reserves of RBI in the form of gold, improve CAD, direct funding to infrastructure or other preferred sectors and add to the GDP. Our conservative estimates suggest that such a scheme, if implemented with proper safeguards, could mobilise at least R1 lakh crore (1% of the GDP) at the minimum! Interestingly, if we allow such deposits to be calculated as CRR /SLR, these will have a further multiplier impact of freeing up R1 lakh crore from NDTL estimates.
The decision to incentivise transactions through plastic money may have far-reaching implications. High usage of cash has substantial costs and, as per our estimates, the social cost of this may be 2.1% of the GDP (March 2012) after correcting for seigniorage which is a pure transfer from banks, consumers and sub-contractors to the central bank, but adjusting for unaccounted money, circulating within the country. Our estimate of the social cost of unaccounted money going out of the country stands at 1.5% to GDP.
Against such costs of cash transactions, incentivising credit and debit card usage would lower the social cost of unaccounted money. It may be noted that card penetration (for credit card, it is at 1.7% of the GDP) in the country is significantly on the lower side, which leads to a lower average transaction value per card (debit + credit at R4,500 only). So, it may not be possible to encourage people to use credit or debit cards without offering incentives. A few options may be considered to push plastic money usage. The government must ensure compulsory card payments for all high-value transactions (say, R50,000 and above). To incentivise this, a proportion of the expenses may be set off for calculating income tax. Such set-offs will still result in revenue gain as otherwise such transactions could have been made in cash and remained unaccounted for. These transactions will add almost R300 crore to the bottom line of the banks through fee income.
The other positive steps in the Budget, with significant long-term qualitative implications, include the proposal to frame a bankruptcy law and a dispute settlement mechanism. The disputes arising during the course of project activities should be settled through a dispute review board (DRB). A World Bank study on arbitration upheld DRB recommendations in 92% of the cases in India, and the same was confirmed in 90% of the cases by the courts. The Indian infrastructure sector is hindered by disputes and time-consuming litigation whereas the practice world over is to settle such matters through DRBs so that the project work and contractors do not suffer. This will help the banks to hasten recovery and enable a pick-up in activities in sectors like construction. Also, the move to align NBFCs on a par with financial institutions will allow banks to clean up their balance-sheets.
The Budget has also proposed setting up of an autonomous bank board bureau for helping lenders raise capital for meeting expansion needs. This would be a step towards establishing a holding and investment company for banks. This issue was discussed extensively at the Gyan Sangam summit of bankers with the government where PSB heads had suggested the creation of a bank investment committee (BIC) and transfer of the government investment in banks to the BIC. The creation of BIC would, over time, enable the government to reduce ownership to below 51% and help banks generate capital for growth.
By Soumya Kanti Ghosh
The author is chief economic advisor, SBI. Views are personal