The Pradhan Mantri Jan Dhan Yojana (PMJDY) – Prime Minister Narendra Modi’s flagship financial scheme – has led to the opening of nearly 29.6 crore accounts in the last three years, 17.7 crore of which are in rural areas and 11.9 crore in urban areas. The number of RuPay cards has increased to 22.7 crore. The progress has been impressive.
Zero balance accounts have declined from 76.8% in September 2014 to 21.4% by August 23, 2017. The number of accounts opened by women are 14.5 crore. The amount of money in these accounts is Rs 65,900 crore, implying an average of Rs 2,234 in each account as compared to Rs 837 in January 2015. The largest number of accounts, 4.6 crore, have been opened in Uttar Pradesh, followed by 3.1 crore accounts in Bihar and 2.8 crore in West Bengal.
The public sector banks did the herculean task, with State Bank of India accounting for more than ten crore accounts, followed by Bank of Baroda with 2.1 crore accounts. This scheme is a grand success taking into account the fact that total accounts in the banking sector in March 2014 – before the launch of PMJDY – were just about 125 crore.
Why pursue financial inclusion?
To analyse further, it would be interesting to understand the basics of and need for financial inclusion. The committee on financial inclusion of government of India in 2008 defined financial inclusion as the process of ensuring access to financial services, and timely and adequate credit where needed, by vulnerable groups, such as weaker sections and low-income groups, at an affordable cost. Thus, financial inclusion can be expected to provide universal access to a wide range of financial services beyond banking, such as insurance and equity products.
So, why is it necessary that the country like ours should pursue financial inclusion? This is for many reasons. First, a bank account provides dignity to the holder. It is not only the pride of having a bank account which is important but much more important is the fact that a bank account implies availability of financial resources, some for livelihood purposes, at reasonable rates of interest. This implies that the bank account holder cannot be exploited by the greedy money lender and discourage productive activity by high rates of interest. It is precisely for this reason that the government has been making efforts since the beginning of planning era to ensure that a large number of people are covered under various schemes of financial inclusion.
Most importantly, financial inclusion enables improved and sustainable economic and social development of the country. The objective of financial inclusion is to ensure easy availability of financial services which allows maximum investment in business opportunities, education and savings for retirement, insurance against risks and the like by individuals and firms located in rural areas. The household access to financial services includes access to contingency planning and credit. Access to contingency planning would help in consumption smoothing and future savings such as retirement savings and insurable contingencies, and access to credit includes emergency loans, housing loans and consumption loans.
Finally, the fast growing Indian economy can only ensure the growth process to be equitable and sustainable if different sections of the society, especially the vulnerable and poor, are included in the growth process. The existence of a bank account can facilitate the government to provide assistance and resources directly to the needy, eliminating intermediaries.
Contextualising Jan Dhan Yojana
Contrary to general belief, India is a pioneer in financial inclusion. The financial inclusion exercise started in India in 1995 when the State Bank of India was nationalised, followed by more nationalisation of private sector banks in 1969 and 1980. The objective of nationalisation was precisely to extend banking activities to the unbanked population, both in the rural and urban areas.
As early as 1974, India started actively pursuing priority sector lending wherein the laser beam focus was on ensuring availability of credit to weaker segments of the society. Other initiatives included establishing regional rural banks (1975) and adopting service area approach (1989) and self-help group-bank linkage programme (1989, 1990). The Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural Development (NABARD) have been making concerted efforts in extending banking across the country under which well-known schemes of microfinance initiatives, and business correspondents were launched. To ensure the expansion of account openings, the RBI had also simplified norms on know your customer requirements.
In order to overcome barriers, the banking sector has been making various efforts, including technological innovations such as ATMs, credit and debit cards, internet banking, introducing electronic benefit transfer, using mobile technology etc. Although different initiatives of financial inclusion contributed in changing the landscape of banking in India, there were still important factors; such as poverty, low-income levels and distance from bank branches that were restricting vulnerable groups from getting access to the formal banking system. According to Census 2011, only 58.7% of total households in India and only 54.4% households in rural areas had access to formal banking services. The data also revealed that only 24.4 million farmer households (27.3%), out of a total of 89.3 million households had access to credit from institutional sources. In other words, nearly 73% of farm households did not have access to formal credit sources.
It is in this scenario that the initiatives were taken by the government, especially PMJDY, has to be contextualised. The schemes that followed since then like the Micro Units Development and Refinance Agency (MUDRA) banks aimed to not only achieve financial inclusion but also ensure inclusive growth. MUDRA, launched on April 8, 2015, has already disbursed an amount of nearly Rs 3.7 lakh crore to 8.8 crore borrowers, of which nearly three-fourth are women.
The RBI has already covered 4.7 lakh villages under the banking system with 19,875 villages with a brick and mortar branch, 4.3 lakh villages through business correspondents and 20,902 villages through other modes like mobile vans. The RBI is persistently pursuing financial inclusion through the revised branch authorisation policy, review of unbanked rural centres and undertaking financial literacy drive by setting up centres for financial literacy which are being pilot tested in nine states across 80 blocks in collaboration with NGOs. A national strategy for financial inclusion is being prepared to focus on developing physical and digital infrastructure, regulatory framework, fostering competition, increased financial awareness and grievance redressal mechanism.
Course corrections on the road ahead
There is a need to examine some emerging gaps in the drive to achieve financial inclusion. First, there is need to extend financial inclusion to the disabled, including those elderly where locomotor activity, vision and hearing is impaired. RBI directives to banks to be accessible to all kind of disabled have not seen notable progress with very few ATMs and bank branches being disabled-friendly. Traditionally, in India, individuals with any disability are generally considered invisible and therefore policy making ignores such differently-abled persons.
Also, the society nurtured in the philosophy of karma, probably also considers that it is the responsibility of the family and the individual to suffer without considering it as a burden, preferably silently, to condone for their past actions. But that attitude is changing. Modern India is on the move and with the rising level of literacy, urbanisation, massive emigration and nuclearisation of families, burden and cost of managing and supporting a family member with a disability are being recognised transparently.
In a welfare-oriented society like ours, it is very important that the government and institutions play an important role in providing for the disabled and sharing the responsibility of facilitating the life of a differently-abled citizen. Interestingly, India, a signatory to the United Nations Convention on the Rights of Persons with Disabilities, in effect from May 2008, has an international obligation to comply with the convention which promotes, defends and reinforces human rights of the disabled.
Field studies have also revealed that demonetisation led many villagers to local money lenders who took advantage and raised the interest rates. Therefore, the reach of ATMs needs to be expanded, probably by having an arrangement with 1.4 lakh post offices in rural areas.
There is potential for more expansion of financial inclusion but for the technological issues like frequent machine breakdowns and lack of connectivity which negatively impact the confidence of customers towards informal banking. The problems with hand-held devices continue to deter financial inclusion. There is a need for facilities like biometric-enabled and multi-lingual hand-held devices which can provide confidence in rural masses. Technological innovations like integrated machines that have the functionality of cash withdrawals and deposits; facility of scanning documents to facilitate new account opening and loan disbursals; voice commands and narration for all available facilities and a multi-language format could help increase banking penetration.
The attrition rate of business correspondents can be reduced by ensuring higher remuneration by permitting to market other financial instruments like pension and insurance schemes, mutual funds and remittances. Similarly, there is scope for providing enhanced incentives for business correspondents operating in remote areas with adverse demographic and income levels where, historically, number of transactions are low.
The instruments offered under financial inclusion also need consideration. There is significant difference in socio-economic background of people living in India and therefore there is a need for flexibility in financial schemes designed for different segments of unbanked population. Illustratively, standard instruments that are offered to salaried segments of society like recurring deposit schemes would need to differ in rural areas depending on cycle of agriculture produce. Irregular and infrequent income spurts do not allow workers in informal sector to maintain savings in recurring deposit accounts.
Finally, to monitor developments regarding financial inclusion, there is a need to assign responsibility to a dedicated financial institution. National Bank for Agriculture and Rural Development probably is the most appropriate institution to be made accountable for furthering progress of financial inclusion.
Charan Singh is a visiting faculty member at IIM-Bangalore. Views expressed here are personal.