Duplication of accounts, account dormancy and the financial unsustainability of the Bank Mitra model. While the Jan Dhan Yojana may be one of the most exhaustive financial inclusion processes to date, there’s still more to be done.
On August 15, 2014, Modi announced his mission to make banking facilities available to all households in India, which would go onto become a key fixture of his development ‘JAM’ policy. Less than six months later, over 11.5 crore bank accounts were opened (1.5 crore accounts after just a week), a feat that apparently made its way into the Guinness Book of World records.
A little over a year later – as of April 20, 2016 – the numbers appear to speak for themselves. Nearly ww crore (220 million) accounts have been opened so far, with the total deposits amounting to a little over 36,700 crore rupees. Last weekend, in a speech at Varanasi, Modi pointed out how JDY was helping the “poor battle poverty”. “Our experience during Jan Dhan Yojana brought out the richness of the poor,” he said.
Has the government’s massive push towards financial inclusion been successful? How much should we worry about duplication and zero-balance accounts? Will the bank mitra/bank correspondent model work now that they need to focus on transactions rather than enrollment? And, is JDY better viewed as a platform for Aadhaar-based transfers rather than a meaningful attempt bringing banking services to the poorest of the poor? The Wire breaks it down.
What is JDY and how should we place it in the larger quest for financial inclusion?
The project’s ambition and implementation are perhaps unprecedented. While the history of financial inclusion dates back to 1969, when the nationalisation of banks took place, the JDY has on paper carried out the most exhaustive financial inclusion process to date. Its initial goal of opening one bank account per Indian household was achieved (again, on paper) in January, 2016.
The idea of pushing people to sign up for zero-balance accounts, however, isn’t new. In 2005, the Reserve Bank of India and the UPA government, with financial inclusion in mind, came up with the idea of a “no-frills” account that didn’t require its user to maintain any particular amount of money in it. These type of accounts were later bureaucratically renamed to the “Basic Savings Bank Deposit Account” and the process of signing up people for these accounts slowly started taking place. From 2005 to 2013, the two UPA governments succeeded in opening up a little over 24 crore basic accounts, a good chunk of which had zero balance and very little in the way of transaction activity.
In contrast, the Modi government has managed to open a similar number of accounts (nearly 23 crore) in less than two years. There are a number of accounts that indicate the JDY push has sharper focus and better concentration and has managed to nudge public sector banks towards serious financial inclusion.
“The type of impetus that this [JDY] has given to the system is unparalleled. During the initial phases, bank managers were forced to leave their offices, go to far-flung areas and display a form of customer service that was usually not seen,” IIM Bangalore professor Charan Singh told The Wire.
Are there any issues that have arisen because of the JDY’s rapid push?
There isn’t a lot of quantitative or qualitative research into effectiveness of the JDY beyond how many accounts have been opened: much of the mainstream media reporting around the issue comes from the numbers put out by the government itself, which by itself are not very flattering.
The majority of empirical analysis into the financial inclusion project comes from a number of think-tanks such as MicroSave (a study that received guidance and support from the ministry of finance), CMF and Skoch. Professor Singh and a number of his students have also conducted research into the Jan Dhan ecosystem in Karnataka.
The twin issues that come up repeatedly are those of account duplication and account dormancy.
How do account duplication and dormancy affect the JDY’s mission?
According to MicroSave’s third study, customer account duplication under the JDY stands at 33%. This essentially means that of the 22 crore accounts opened under JDY, the owners of a little over 7 crore of those accounts already hold another account in addition to the JDY account.
The problem with this is that if the people who sign up for a bank account under JDY already hold another bank account, the purposes of financial inclusion aren’t really being served.
According to first hand-accounts from MicroSave’s qualitative research, this duplication “can be attributed to the target-based account open approach taken by banks”. What compounded this problem was that bank correspondents or bank mitras (as the JDY lexicon refers to them) received incentives for the opening of an account irrespective of whether the customers already had an account.
Initial advertising surrounding JDY may have also misled potential customers, some of whom thought that only the JDY account could be used to receive subsidies and benefit. Another common example that pops up is that customers mistook the overdraft (credit) facility of Rs. 5,000 as a free Rs. 5,000 that would be given on signing up.
The other issue of dormancy is one addressed by the government’s numbers: a little less than 30% of accounts are ‘dormant’, which, practically speaking, means that they are zero-balance accounts with minimal transactional activity.
“Are all accounts operational? I have my doubts. The government states that 70% of JDY accounts are operational but even here there is some doubt [about these numbers]. To a certain extent, [some of] these people are those who didn’t need a bank account,” Singh told The Wire.
Dormancy is an issue because zero-balance accounts still cost the bank in terms of maintenance; various estimates put maintaining a zero-balance account at anywhere between Rs. 100 to Rs. 150 per year. With nearly 7 crore JDY bank accounts being dormant, this costs the banks that signed them up anywhere between Rs. 650 – 760 crore per year.
Also, as with account duplication, if the incidence of account dormancy is high, it undermines the mission behind JDY, which is to bring banking services to the unbanked.
Could it be that duplication and dormancy are linked though?
A number of commentators believe so and to a certain extent, it’s backed up by numbers. The theory behind this is that the incidence of duplication (roughly 30%) and dormancy (roughly 30%) are one and the same because the people who hold accounts apart from their JDY account are unlikely to use their JDY account.
Firstpost’s Dinesh Unnikrishnan believes that we shouldn’t have to worry too much about dormant accounts because as the Aadhaar-bank account subsidy transfer process rolls out, people will start using their JDY accounts. However, if the majority of people who hold a JDY bank account and another bank account (which is Aadhaar-seeded), this may not be true.
Are there are any other issues with the way account enrollment has been carried out?
As with any major government scheme, the research put out by MicroSave and other agencies, as well as Singh, show that the JDY process isn’t completely above the board. There are reports of customers being charged for withdrawals, charged for setting up their accounts (anywhere between Rs. 100 to Rs. 500) and so on. For instance, according to MicroSave’s research, a few business correspondents in Madhya Pradesh stated that “all customers were charged for withdrawal as well as depositing cash in their JDY accounts”.
Customers in Jind, Haryana have complained for over six months that 16 rupees was deducted from their accounts every month as some vague “mobile alert charge”. Singh’s research in and around Bangalore shows that some respondents were asked to pay bribes to open their Jan Dhan account.
According to a public sector bank executive in charge of overseeing the bank’s Tamil Nadu JDY push, these issues “unfortunately arise” when there is a push for results and very little oversight on how the targets are achieved.
How effective has JDY’s Bank Mitra (Bank Correspondent) model been in reaching out to the unbanked?
The financial inclusion initiative reaches out to the unbanked through two methods: traditional bank branches and business correspondents (called bank mitras in JDY lexicon), who are appointed as bank representatives and trained to enroll people and handle transactions. Singh’s research in parts of Karnataka that most people signed up through the reach of traditional bank branches.
However, when one considers low-income category people in remote, rural areas that bank branches and ATM networks cannot penetrate, the effectiveness of the bank mitra model needs to be judged. MicroSave’s research lists a number of issues with the financial sustainability of bank mitras (BMs) as the JDY project moves from simply opening accounts to engaging with their customers and conducting transactions.
A little over 10% of business correspondents, surveyed by MicroSave, are currently dormant; the rate of dormancy has inched up over the last 14 months. According to the survey, “detailed analysis revealed that aspects such as inadequate commission, poor support from banks and the lack of business potential” as a major contributor to BM dormancy.
“Most bank mitras are not trained and they make only Rs. 3,500 – Rs. 4,000 per month, which is less than what they expect. Furthermore, the BM model does not authorise them to handle more complex transactions, which anyway they cannot do because of lack of training,” Singh told The Wire.
“They [BMs] like the job as it brings them respect but money involved is very less. Its a Catch-22 situation, we need more BM’s in every village in order for it to be successful but unless BM’s make more money nobody will sign up.”
Banks currently do not reimburse operational costs such as the travel that BMs have to undertake to link branches, stationery, rent and connectivity. A number of bank executives that The Wire spoke to also said that the capital subsidy for point of sale machines that was supposed to be distributed still has not made its way to many regions.
While BMs initially received incentives for signing up people for accounts, as saturation sets in they have to make money off transactions. This money isn’t rolling in yet, although things may change when Aadhaar-based subsidy transfers start rolling out.
Consequently, as MicroSave puts it “BMs are troubled by non-transparency and irregularity of commission payments… it remains to be seen how long they continue to engage in a business with questionable returns.
Has JDY laid the ground-work for Modi’s JAM policy?
The JAM policy is simple and is effectively an ecosystem that builds on itself. First the JDY initiative opens up bank accounts for the unbanked. These accounts are then seeded with Aadhaar numbers which paves the way for subsidy transfers. With mobile phones, transfers and transactions become much easier — thus resulting in a cashless society.
MicroSave’s research points out two issues with this. First, while 89% of the bank correspondents have devices that enable biometric authentication, not all of these are Aadhaar-based authentication. Only 72% of BMs currently have Aadhaar-enabled devices.
While this is a big improvement from the numbers that other studies put out in the first few months after JDY was started, the lack of Aadhaar-specific devices “will negatively impact the roll-out of DBT through JDY accounts in the future.” Indeed, this is a problem that others have noted already.
Aadhaar-enabled devices are only one half of the picture though. In order for subsidy transfers to be deposited in JDY bank accounts, they needed to be seeded with Aadhaar numbers. According to one research study, the Aadhaar seeding rate is 62% which while positive is “extremely slow”. MicroSave notes that “inadequate Aadhaar seeding deprives customers to hatch on to Aadhaar-enabled payment system.”
The second phase of JDY needs to desperately focus on this — even as the Modi government has set 2017 as a target for the full rollout of Aadhaar-based subsidy transfers.
Beyond opening bank accounts, has JDY succeeded in bringing previously unbanked customers into the financial fold? What about transactions, investments and other financial products?
The ultimate goal of JDY is to bring about financial inclusion. While the very first step of this involves opening up a bank account, the ultimate goal is to bring the unbanked into the financial system. This is why the JDY account is bundled with insurance and pension products, need-based credit and overdraft and remittance facilities.
To JDY and Modi’s credit, out of the first-time account holders who did sign up through JDY, the low-cost insurance and pension schemes have been relatively popular. MicroSave’s numbers assess that nearly 56% of JDY customers have signed up for an insurance or pension scheme primarily due to its “excellent value proposition and low cost”. There are a number of heart-warming, anecdotal stories of the JDY insurance plan helping out when it is needed most.
However, when it comes to other aspects of financial inclusion, it is clear that the JDY has a long way to go. For instance, each JDY account comes bundled with a RuPay debit card. Not only is the RuPay card distribution rate low (47%) — but the people who have been assigned cards face “issues of non-delivery and non-issuance of PINs”, according to MicroSave’s research. Last-mile connectivity issues are a huge problem that is flagged by almost every study on JDY’s progress.
There are a number of first-hand accounts in the research that point out many customers see no use in a RuPay card – while others worry that family members will misuse the card if it is given to them.
When it comes other financial products such as the overdraft (OD) facility, according to MicroSave, “qualitative analysis revealed banks disinterest in extending OD facility to [JDY] customers, given banks’ unwillingness to take up credit risk for customers with lack of credit and transaction history”. According to the study, only 2% customers per BM have received OD till date.
“If you ask me, while [JDY] is laudable, it is certainly not a runaway success. I don’t think JDY will be commercially viable for the next five years,” said Singh.
Singh’s prescription is more simple: rather than try to push urban-centric financial products on the poorer sections of society, it makes more sense to popularise and spread specific financial instruments aimed at that section of the population. One example of this could be an everyday recurring deposit scheme, or a financial plan that centers around harvest season.