Mahatma Gandhi tried to end untouchability in the society, if we want to eradicate poverty, we need to get rid of financial untouchability,” Prime Minister Narendra Modi said while launching the Pradhan Mantri Jan Dhan Yojana (PMJDY).
Under the new scheme, Modi has promised a bank account for every un-banked household by 26th January 2015. At the time of the launch of the scheme on 28th August 2014, over 75 million households out of a total nearly 250 million did not have access to any banking services. This means,at least 75 million new bank accounts have to be opened between 28th August 2014 and 26th January 2015, i.e. in less than five months. The target is to ensure at least two bank accounts to every household, out of which one should be in the name of a female member. So, over 150 million new accounts have to be opened under the PMJDY.
Sheer numbers make it one of the most ambitious financial inclusion initiatives in the world and clearly the largest such exercise in India. As on 7th October, 55.2 million accounts were opened under the scheme and deposits of Rs 4,268 crore were mobilised.
The financial inclusion has been a buzzword in recent years. The focus of financial inclusion during Manmohan Singh-led United Progressive Alliance (UPA) government was “no-frill” accounts, which were basically “no-use” accounts. While the banks opened the accounts to comply with the government’s diktat, hardly any transactions took place through these. The “no-frill” accounts are the basic savings accounts with no minimum balance and fewer paperwork requirements. More than 80 per cent of accounts opened under financial inclusion programme of UPA government have remained dormant.
What is different in the new plan that ensures that it does not meet the same fate as the programme run during the previous regime?
The financial inclusion programme of the UPA government was based on the traditional approach for banking development through egalitarian objectives. The focus was on expanding the banking networks in rural and unbanked areas. The initiative called “Swabhimaan” that started in 2011 set a target to ensure a bank branch in all the villages with population of 2,000 or more by March 2012. The banks in general were directed to open “no-frill” accounts. Out of the 5.92 lakh villages in the country, only 74,000 villages could be covered.
Modi’s financial inclusion plan seems to be moving towards a market-led policy framework. Here the focus is on ensuring accounts to households. Under the Jan Dhan Yojna, the targets are households, while under the UPA plan the focus was on villages. The new scheme does not differentiate between rural and urban areas, its focus is on unbanked households, while the scheme under the previous regime was focused on increasing banking penetration in villages or rural areas.
However, there is no clarity on expansion of infrastructure. In this situation, banks would be expected to expand infrastructure depending on the requirements. Additional products like insurance, overdraft facilities and debit cards have been linked to the account. These additional benefits should ensure that the accounts opened under Jan Dhan do not remain dormant, as was the case with the “no-frill” accounts.
Each account opened under the Pradhan Mantri Jan Dhan Yojana will come with a RuPay debit card having inbuilt accident insurance cover of 1lakh. An overdraft facility of upto Rs 5000 will be permitted to Aadhaar-enabled accounts after satisfactory operation in the account for 6 months.
Further an additional life insurance cover of Rs 30,000 will be provided for those opening the accounts before 26th January 2015.The government has asked all state-run insurers including the Life Insurance Corporation (LIC), to introduce micro-insurance products. Such products would cover personal accident and life, besides other areas like crop.
For the first time states have been made equal stakeholders, which is a welcome change from all earlier schemes on financial inclusion including Swabhimaan. More than 19 chief ministers participated in the launch programme in the national capital, irrespective of party lines. Wherever, CMs could not come, senior ministers from states represented them.
Modi’s financial inclusion plan seems to be moving towards a market-led policy framework. Here the focus is on ensuring accounts to households. Under the Jan Dhan, the targets are households, while under the UPA’s scheme the focus was on villages.
Almost 40 per cent of Indians have no access to banking system. Even among those who have the accounts, a large number of such accounts are just for the appearance. There is hardly any transaction from such accounts. According to a report prepared by Nachiket Mor Committee in December 2013, around 60 per cent of India’s population doesn’t have functional bank accounts. A staggering 90 per cent of small businesses have no linkages with the formal financial institutions.
Around 41 per cent of 246.7 million households in India have no access to the banking services, as per the 2011 census data. Situation is obviously worse in rural areas where 46 per cent of the total 167.8 million households did not have access to banking facilities, while out of the total 78.9 million urban households, 33 per cent were out of the banking net.
Exclusion of the majority of the population from any access to financial services, no doubt, inhibits the growth impetus of the country. Moreover, it creates vicious cycle of poverty. In the absence of the formal banking facilities, people depend on moneylenders and forced to pay exorbitant interests. At the inaugural function of Jan Dhan scheme, the prime minister admitted that moneylenders charge “five times the usual rate.” The ground reality could be even worse. This forces people to perpetuate in the condition of poverty despite marginal increase in their income level.
There is evidence that financial inclusion is crucial to poverty reduction. Banking services will help in better targeting of subsidies and welfare schemes. It will also help improve measurement of economic growth and development.
The government spends over $43 billion on subsidy, mostly on fuel, food and fertiliser. Subsidy bill is inflated due to wastes and corruption in the system. Better targeting would help in plugging the leakages and lower the subsidy bill.
The know-your-customer (KYC) rules to open the account under the Pradhan Mantri Jan Dhan Yojana have been simplified. Apart from Aadhaar card, several other documents such as voter identity card, driving licence, Permanent Account Number (PAN) and card issued under Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are also valid. Any of these documents would be sufficient to open the account.
In case, the address mentioned in the document is different from the current residence of the applicant, a self-declaration will suffice.
The accounts opened under Jan Dhan are in the category of Basic Savings Bank Deposit Accounts (BSBDA).
However, several questions remain unanswered. The Jan Dhan scheme is essentially for the unbanked population. What about those poor people who had opened the bank accounts before the scheme was launched? A top Finance Ministry official clarified at a Skoch event that the benefits will be extended to the poor people who had already opened an account, but the definition of poor for the scheme is not clear.
More clarity is required on insurance. How will it work? Who will pay the premium? Under the scheme an accident insurance is inbuilt with the RuPay debit card that will be issued to each account holder. The National Payments Corporation of India (NPCI) that runs the RuPay cards will bear the cost of the accident insurance, but more clarity is required on how in reality it will work.
Even bigger ambiguity is in the case of life insurance. The proposal is to provide life insurance cover of Rs 30,000 to all those who open the account under the scheme by 26th January 2015. As per the target, all 75 million unbanked households are expected to open the account during this period and thus will be eligible for the life insurance cover of Rs 30,000. LIC that controls more than two-thirds of the life insurance business in the country, is expected to be given the responsibility for ensuring life cover under the Jan Dhan scheme. However, the government-run insurer has shown unwillingness to bear the cost of the scheme.
Talks are also on to partly charge the beneficiary for the insurance premiums. But clarity is required.While insurance has been linked with the bank accounts, there is no clarity on the claims procedure. There is also no clarity, until such time when the account is opened and RuPay card is issued, whether the person is entitled for insurance general or life.
Balance sheets of banks, especially the government-run lenders, are severely strained. The listed banks had Gross Non-Performing Assets (NPAs) or bad loans, to the tune of Rs 2.5 lakh crore as on 31st March 2014. Government-run banks that account for two-thirds of loans, have over 80 per cent of bad assets. Gross NPAs of public sector banks rose to 4.03 per cent in the financial year 2013-14 from 3.42 per cent in 2012-13 and 2.94 per cent in 2011-12.
What is more disturbing is the piling restructured loans that soared to 5.9 per cent of gross advances in March 2014 from 2.5 per cent in June 2011. While the loans where the borrowers have defaulted are categorised as bad loans, restructured loans can be simply put as the situation where the borrowers have threatened to default.
Stressed loans that include the bad loans and the restructured loans now stand at nearly Rs 10 lakh crore, which is more than the total net worth of the banks. Stressed loans accounted for almost 10 per cent of the total bank advances in March 2014 and is expected to soar to 14 per cent by the end of the current fiscal, according to a Fitch Ratings report.
According to the report of a committee headed by former Axis Bank Chairman P J Nayak, banks are required to raise an additional Rs 5.8 lakh crore just to meet the new Basel norms for capital adequacy. Where the money will come from for the expansion of infrastructure to service the additional 150 million accounts? The equal focus has to be on expanding the banking infrastructure. The government and the Reserve Bank of India (RBI) may direct and facilitate in opening the accounts by brining the people to the branch and organising the camps etc. but ultimately the services have to be provided by the banks.
Many analysts see the proposed Rs 5,000 overdraft facility as a “loan mela” that may result in a huge bad loan for the banks. Considering the kind of stress the banks are going through, any such exercise would further worsen the situation.
Insurance is an integral part of financial inclusion. If someone has wealth but no insurance cover, he/she can’t be sure about his/her future as the wealth can be eroded overnight. So the focus on insurance in the new scheme is a step in the right direction and makes it financial inclusion in true sense, if implemented properly.
Insurance penetration in India is amongst the lowest in the world. Only 3.1 per cent of over 1.25 billion Indians have life insurance. In case of non-life insurance the situation is even worse. Just 0.8 per cent of the total population has non-life insurance cover. Forget the villages, over 50 district headquarters do not have any insurance company branch.
Financial condition of insurance companies is even worse than the banks’. Balance sheets of most of the insurance companies are in the red. After registering an average 31 per cent annual growth between 2001-2010, new business premium of life insurance has been stagnant in the past three years. Slow economic growth, stalled reform, rising costs and inefficient distribution structures have hit the industry hard.
The insurance industry seems to be in a state of flux. The challenge is to expand infrastructure and increase penetration. There is need for a comprehensive reform in the insurance sector. More private players should be encouraged. The Insurance Laws (Amendment) Bill that seeks to enhance foreign equity holding cap in the sector to 49 per cent from the current 26 per cent must be pushed forward on a priority basis. Enhanced foreign investments will help in expansion of the cash-starved industry.
India’s insurable population is estimated to reach 750 million by 2020. No wonder, considering this huge customer base, foreign insurers are keen to expand in the Indian markets. Challenge for the policymakers is to ensure that the majority of the population, who has been left out, be brought under the insurance cover. Typically, private companies, including foreign firms, try to maximise profits and show less concern about the poor or financial inclusion. They would prefer selling policies to relatively well off, as it is generally more profitable.
Most of the accounts are opened under the scheme through special camps held across the country. On the launch day 77,852 special camps were organised. All those who approached the banks through branch or the special camps are opened accounts without proper screening. There are two problems with it. First is the spectre of the duplication. Mostly those people who already have accounts may end up opening the new ones in expectation of getting the benefits of insurance and overdraft facilities. According to the bankers, at least a fifth of the accounts opened under the scheme are fake. People can simply go to other bank and open an account. There is no procedure to prevent such duplication at this point of time.
The second big problem is related to the security. The KYC norms followed for opening such accounts are very poor. Only one document is taken for identity and address proof and just a declaration by the applicant is sufficient for change in address proof. This may lead to misuse of the system and pose a security threat.
The slogan of the new scheme is “Mera Khata, Bhagya Vidhata”. When translated into English it reads “my account, the creator of good fortune.” Here the approach is account-centric. The entire focus is on opening the accounts. On the first day of the launch itself, 15 million accounts were opened and within a first few days, the number went upto 25 million. Therefore, opening of the 75 million bank accounts as a target in five months looks very easy. The real challenge is the service delivery. Just opening of the account won’t bring good fortune. The account would turn divine only when the banking services in true sense reach to the masses.
A blanket bureaucratic target setting can only yield unhealthy results and it would meet the same fate as the previous financial inclusion plans that ended up opening “no-use” accounts.
Even after years of deregulating interest rates, most banks continue to give only 4 per cent interest on savings bank deposits. Banks like Yes Bank and Kotak offer higher rate of interest. When Jan Dhan accounts are opened (by 7th October Rs 4,268 crore were deposited), the poor beneficiaries should get enhanced benefit rather than subsidising lending to the rich.This cartelisation should be looked into.
Given the limitations of the banking infrastructure, the scheme is heavily dependent on Business Correspondents (BCs) or Bank Mitras. They need to be adequately compensated for the services. While the proposed 1 per cent transaction fee is a good start, it should be hiked to 3 per cent as suggested by Skoch on various occasions.
To add synergy in the Jan Dhan Yojna, the Department of Posts (DoP) should be immediately given a full banking license. India has the world’s largest postal network. The total number of post offices is over 1.55 lakh, which is substantially higher than the total number of bank branches. So, these existing networks must be leveraged on.
As on 31st March 2014, total number of bank branches in the country was 1,15,082. Out of these 43,962 branches or 38.2 per cent of the total was in the rural areas. Compare it with the post offices. Out of the total 1.55 lakh network, 1,39,144 or 89.76 per cent of the total are in rural areas. Thus, India’s banking network can more than double just by bringing post offices on board. The Jan Dhan Yojna should take care of these concerns for carrying forward the aim—to deliver for the poor and marginalised.
The Mahila Bank has not played any formidable role in financial inclusion or empowerment of women, so far. It should rather be converted into a Developmental Financial Institution to encourage SHGs and linkage with livelihood. It should take the lead from NABARD, which was entrusted with the responsibility of promoting the SHG movement, which it has lagged for many years now.
Until now the focus of Jan Dhan scheme is on opening the bank accounts. But this is just a first step. An account or debit card itself would do nothing. The challenge is to ensure that all the government’s subsidy and welfare schemes are routed through these accounts and they are utilised properly. An environment has to be created where a poor person from village walks into a shop, buys goods and pays through his RuPay debit card. For this, there should be money in the account and the fear of being cheated be removed from the mind. Only then financial untouchability will end in true sense.
RuPay is an indigenous debit card introduced by the National Payments Corporation of India (NPCI). The card is accepted at all ATMs (for cash withdrawal) and at most of the PoS (point of sales) terminals and online merchants. There are around 1 million PoS and over 15,000 online merchants in India. The company also provides e-commerce payment solution under the brand name PaySecure. It has roped in big online merchants like Flipkart, Snapdeal, Homeshop18, BookMyShow and IRCTC.
Charges for RuPay cards are over 40 per cent lower than its direct competitors that include Visa and MasterCard.
RuPay cards will play a crucial role in enhancing financial inclusion in the country. The success of Jan Dhan scheme is heavily dependent on it. NPCI that runs the RuPay cards will bear the cost of the accidental insurance under Jan Dhan. However, to get the benefits of accidental insurance, RuPay cards must be used at least once in 45 days.
Gyanendra Keshri is
Executive Editor, INCLUSION
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