Why This Country Is Giving Every Household A Bank Account

CREDIT: AP Photo /Manish Swarup

An Indian woman gives a thumb impression before opening a new bank account as part of a new plan to give more people access

Nearly 40 percent of people in India have no access to mainstream financial services. But that could soon change under a plan from Prime Minister Narenda Modi.

Under Modi’s plan, which he launched on Thursday, every household would get a bank account. The government is aiming to open an account for 75 million households by 2018 and to have two account holders in each. Tens of thousands have applied for an account since a speech unveiling the plan on August 15.

Account holders would get a debit card, overdraft protection up to 5,000 rupees, or $83, and accident insurance of up to 100,000 rupees ($1,654).

Giving every household in India a bank account, over 40 percent of whom live on less than a dollar a day, would mean they would no longer have to rely on moneylenders and informal agencies who operate outside formal regulation and charge astronomical rates. “When a bank account is opened, it’s a step towards joining the economic mainstream,” Modi said of his program, adding that there is an “urgency to this exercise as all other development activities are hindered by this single disability.”

It could also create a system where the government could give citizens welfare benefits directly instead of the current set up where it hands out subsidized goods, which is inefficient and can lead to corruption. Just 4 percent of Indians get benefits through bank accounts, but increasing that share could cut the cost to the government of handing them out.

One challenge for the plan will be the fact that opening an account usually requires a number of papers like birth certificates and proof of address. But the Reserve Bank of India has introduced simplified requirements that only require one piece of identification.

According to the World Bank, just 35 percent of the nearly 1.3 billion people in India have access to a bank account, compared to an average of 50 percent across the globe.

While the share is smaller in the U.S., for such a wealthy country it is still remarkably high. More than a quarter of American households are either unbanked — with no access to the mainstream banking system — or underbanked, relying mostly on alternative financial products. Breaking that down, 8.2 percent of households, or nearly 17 million adults, are unbanked, while over 20 percent are underbanked, or 51 million adults.

These groups usually turn to unregulated services like payday lenders or check cashers and end up spending, on average, $2,400, or about 10 percent of their income, to access those alternative services. Twelve million people use payday loans every year, spending an average of $520 to borrow $375. These loans have an average interest rate that comes to 339 percent when annualized. Fees alone suck at least $3.4 billion from low-income communities.

In response, a handful of states have sought to regulate these kinds of loans or at least reduce the sky-high interest rates, and the Consumer Financial Protection Bureau has cracked down on some lenders. Congress is also considering a bill that would cap interest rates and seek to combat predatory lending.

But even with regulations and reforms, low-income Americans who can’t access mainstream banking will need access to some sort of financial product. One proposal for doing so would be to use the Postal Service as a public option for banking. The USPS could use its wide-reaching physical infrastructure to give people debit cards, small-dollar loans, and other financial products to those who can’t normally access them, while generating about $9 billion in revenue for itself.