On August 15, 2014, the Pradhan Mantri Jan Dhan Yojana (PMJDY) was announced with the objective to bring the excluded segments of the population under the formal financial system. The scheme focuses on enhancing bank infrastructure to resolve supply constraints and has usage incentives in the form of the Direct Benefits Transfer (DBT) scheme and overdraft facility. Other enablers include multiple access channels (mobile, ATM) and measures to scale up the banking correspondent (bank mitr) model. The government has set a target of covering all 7.5 crore unbanked households by January 26, 2015.
A breakthrough initiative?
A similar campaign, Swabhimaan, was launched in 2011 targeted at bringing 74,000 villages with populations under 2000 under the banking net. The campaign focussed on basic banking services like no-frills savings account, micro-credit, remittances, micro-pension and micro-insurance through multiple banking channels, including banking correspondents. DBT was launched as a pilot in January 2013 to enable direct transfer of subsidy to beneficiary bank accounts.
A close look at the PMJDY shows that it is largely a refurbished version of Swabhimaan with the addition of the overdraft facility, of R5,000 per household (backed by Credit Guarantee Fund to cover defaults), and life insurance cover of R30,000 for first-time accounts. Our assessment of the PMJDY, therefore, must be based on an understanding of the performance of Swabhimaan.Where is the glitch?
Over 1.5 crore PMJDY accounts were opened the launch-day itself and the target, 7.5 crore accounts, was achieved within 3 months. This raises serious questions regarding the preparedness of the banks to handle the volume and possibility of substantially high proportion of duplicate (untargeted) accounts. Will setting target numbers serve the objective? If so, despite lesser targets under Swabhimaan, why are 75% of such accounts dormant?
Though the private banks have also been asked to chip in, they have added only 21 lakh of the 8 crore Jan Dhan accounts opened till November 25, with public sector banks (PSBs) filling the gap. What could be the reason behind lack of interest by private banks? Does PMJDY make commercial sense?
In its 2012 report, the Aadhaar Task Force had suggested a compensation of 3.14% of the DBT amount (with a cap of R20) to banks. The government approving a refund of only 2% fell far short of the recommendation and was considered insufficient, as evident from the lack of interest of private banks. As per the report, the annual cost of each account would be R240 (unamortised account opening cost of R55 plus recurring annual operating cost R185). Assuming 75% of 8 crore accounts to be dormant, this would imply nearly R1,500 crore wasted by banks. These cost estimates do not include cost of upgrading internal infrastructure or opening of new rural branches/ ATMs implying a much higher actual cost.
There is also a need to question the capability of PSBs to manage multiple bank mitr channels. Various such channels—post offices, common service centres (CSCs), public distribution system and self-help groups—have been tapped in the past. However, the response has not been encouraging with over half of the 1.4 lakh bank mitr untraceable.
Are the banks magic wands for implementing the government’s wishes or the real villain behind the failure of the numerous government efforts? With over 40% of the Indian households still out of banking net despite numerous government interventions, there is a need to question the underlying policy process. Launching a scheme within 2 weeks of announcement, without operational clarity on key features (overdraft and life insurance) points towards a typical top-down approach with policy details thrashed out by senior ministry officials and thrust on the banks.
The scheme is committing the same classic mistake of not taking a holistic perspective – importance of a sustainable and scalable business model for the commercial implementation agencies, problems (other than access issues) faced by the beneficiaries (e.g.: trust on bank mitr), importance of other players like state governments and other central government departments (to expedite DBT implementation).
Is there a solution?
Intensive consultation with all stakeholders must be undertaken during policy formulation for a more inclusive policy attracting enthusiastic participation. Efforts towards identifying the unbanked will help more targeted intervention and continuous evaluation with required mid-course correction will minimise the chances and costs of failure.
Focus should be on enabling policy environment for innovative solutions and sustainable business models to emerge for ‘the bottom of the pyramid’. Arvind Nethralaya in India, mPesa (mobile-based deposit and remittance services), Kenya and Grameen Bank, Bangladesh are some of the citable examples of financial services at the bottom of the pyramid that are properly conceptualised and executed.
Enhancing the role of technology-driven bank mitr with strong rural distribution networks (mobile phone operators and service centre agencies like the CSC network) from bank agents to independent niche banks should be seriously considered. They should be able to provide all basic banking services—savings, remittances, micro-credit, micro-insurance and micro-pension for true financial inclusion under appropriate regulatory supervision. Though RBI has proposed ‘payments banks’ to cater to deposit and remittance requirements, restricting operations to select services may impact both the financial inclusion objectives as well as sustainability.
There can be no single and clear solution for such intractable problem as financial inclusion. It is time for a change in mindset with focus on achieving the policy intent rather than target numbers.
Prianka Singhal
