Financial Inclusion

Pradhan Mantri Jan Dhan Yojana and Financial Literacy

Financial Literacy & Economic Activity A Key To Success

By Dr Amrit Patel

The Pradhan Mantri Jan Dhan Yojana [PMJDY] launched on 28th August 2014 is a landmark initiative to link the hitherto excluded poor with the bank and a policy to help them join economic mainstream by removing financial un-touchability.

The scheme envisages opening 150 million bank accounts by January 26, 2015. The bank accounts will be accompanied by an overdraft facility of Rs 5,000, debit cards and accident-insurance cover of Rs 1 Lakh & Life Insurance cover of Rs.3000.

Provision of social security through insurance and pension schemes is a significant policy intervention in the absence of even a rudimentary social security cover for a very large number of poor households. Government’s proposal to route cash transfers in lieu of subsidies in kind through these accounts represents a step towards a part of a comprehensive reforms of the subsidy regime for a number of essential commodities.

.Earlier efforts

With the nationalization of banks and establishment of RRB’s, Government initiated policy and programs to gradually promote financial inclusion, viz. introduction of the concept of the

  1. Lead Bank Scheme
  2. Priority Sector Lending
  3. Service Area Approach
  4. SHG-Bank-Linkage Program by banks & microfinance by MFIs
  5. Implementation of  Financial Inclusion as a banks’ corporate policy
  6. Adoption of the business correspondent (BC) model to provide doorstep delivery of banking services

In response to Government’s directive to banks in October 2011 to open branches in all habitations of 5,000 or more population in under-banked districts and 10,000 or more population in other districts, banks provide banking services in all 129 identified un-banked blocks since March 2012 and opened branches in 3,402 locations out of identified 3,925 in 2013.

Banks, after implementing their board-approved 2010-2013 Financial Inclusion Plan [FIP] as directed by RBI in 2010, currently implement second round of FIP for 2013-16. FIP incorporates self-set targets for opening rural brick-and-mortar branches, hiring services of BCs, covering un-banked villages and offering financial products, viz. Savings Bank Deposits, Kisan Credit Cards and General Credit Cards, among others.

Banks in the first phase covered over 75,000 unbanked villages with population of over 2000 and in the second phase about 4,90,000 unbanked villages with population less than 2,000 are identified and allotted among banks. During 2010-13, 7840 rural branches were opened and banking outlets in villages increased to 2,68,454 from 67,694. Nearly 109 million Savings Bank Accounts were added. Besides, 9.48 million farm sector households and 2.24 million non-farm sector households were financed.

In recent past, about 18.2 million “no-frills accounts” were opened but 80% of them did not have transactions / operations revealing that these account-holders are still not “included” in the true sense of financial inclusion.

These accounts remained dormant and banks incurred costs. Besides, only 3.9 million account holders out of 18.2 million no-frills accounts availed overdraft facilities amounting to Rs155 crore

To make financial inclusion commercially viable for the bank as a whole, Banks continue to expand their branch-network in relatively profitable metro centers.

pradhan mantri financial literacy program

Dismal Progress

Despite all these efforts, all public and private sector banks collectively opened 108.5 million accounts in the last three years. The National Census 2011 reveals that out of 246.7 million households, 144.8 million [58.7%] have access to banking services and 101.9 million [41.3%] have no bank accounts. The World Bank estimates show that only 35.2% adults have accounts with formal financial institutions.

The dismal progress under Financial Inclusion is attributed to inadequate awareness & low level of financial literacy and lack of income-generating economic activity leading to abject poverty among account holders, accompanied by inadequate concern and the inability of banks to guide, counsel and follow-up with the account holders, among others. Unfortunately,  none of the banks attempted to study the factors responsible [area-wise & socio-economic-profile-wise of the clients] for huge number of accounts lying dormant, and the fate of the overdraft facilities involving significant amount that could have helped revisit/redesign the system to achieve the targeted aims.

A survey of financial access in 2011 revealed that India had only 10.6 branches and 8.9 ATMs per 100,000 population as against 23.8 and 49.6 in China and 46.2  and 119.6  in Brazil which are India’s partners in BRICS.

Banks feel reluctant to expand their network in remote and distant geographical areas because of severe stress on profitability, mounting NPAs/bad loans and need for higher capital.

Financial Literacy & Economic Activity

Opening bank accounts may not immediately become viable but it can be over a period of time. While payments from Governments under Direct Benefit Transfer schemes can improve viability following strategic actions by banks can contribute to improve viability.  . .

Government and banks in an effective coordinated manner will have to launch a massive campaign to create full awareness among poor households for their better understanding of the Jan Dhan Yojana and improve the level of education / financial literacy that can help them avail the benefits under the scheme along with the responsibilities attached with it. Simultaneously, banks will have to put in place client-friendly procedure that can encourage /motivate them to operate the bank account rather than allowing to remain dormant since Financial Inclusion aims at continuous operations/transactions in the bank account already opened.

The Rangarajan Committee on Financial Inclusion revealed that over 95% of adults in country’s 256 districts did not have bank loans. Banks under the PMJDY will, therefore, need to ensure that beneficiary uses overdraft facility to acquire assets, pursue economic activity, generate income and ultimately converts it into loan in due course. This calls for concern, commitment and accountability of all stake-holders under the PMJDY to make it result-oriented.

Financial literacy and debt counseling introduced by the RBI is a sine qua non to achieve the aims/objectives of the PMJDY since the very foundation of the financial stability rests on managing all the costs involved or risks associated in the financial inclusion, viz. cost of overdraft, insurance cover, non-repayment/unsettled overdraft facility in the event of zero-credit balance, among others, It is imperative that all intended beneficiaries of the PMJDY must understand their statutory obligations before claiming the benefits/rights under the scheme. If past field experiences are any guide, most beneficiaries of Government sponsored schemes have, unfortunately, developed a culture to receive freebies and politically expedient subsidies.

Banks must focus mobilization of savings by motivating them and extending bank credit hassle-free on lines of SHGs under SHG-Bank-Linkage Program since India’s household savings have been declining since 2009-10, together with strong com-positional shifts from financial to physical savings.

Banks should perceive Financial Inclusion as a business opportunity, rather than a compulsion, and use it as a means to expand the resource base of country’s financial system, protect low-income groups from being exploited by moneylenders and improve the effectiveness of  the system to reduce the scope of the unorganized sector.

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