Pradhan Mantri Jan Dhan Yojana – Empowering India through Wealth

Prime Minister Narendra Modi’s ambitious financial inclusion scheme finally kicked-off today. The scheme aims to accomplish the objective of providing basic banking accounts with a debit card with inbuilt accident insurance. The Government plans to open at least one crore bank accounts on the first day itself. Various State Governments also flagged-off this scheme. Prime Minister also unveiled a logo and a Mission Document on Financial Inclusion. He also dedicated the mobile banking facility on the basic mobile phone (USSD) to the nation. Union Finance Minister Arun Jaitley, Minister of State for Finance Nirmala Sitharaman, RBI Governor Raghuram Rajan and other senior officials attended the function.

Its main features include Rs 5,000 overdraft facility for Aadhar-linked accounts, RuPay Debit Card with inbuilt Rs 1 lakh accident insurance cover and minimum monthly remuneration of Rs 5,000 to business correspondents who will provide the last link between the account holders and the bank. The banking network is all set to open bank accounts of the uncovered households in both rural and urban areas. In fact, the banking sector would be expanding itself to set up an additional 50,000 business correspondents, more than 7,000 branches and more than 20,000 new ATMs in the first phase.

Here are a few pointers that explain the need for the scheme:

Senior Assistant Country Director in India for the UNDP, K Seeta Prabhu opines that with an estimated 135 million households without access to banking facilities, India is second only to China in the number of people excluded from financial facilities. In fact, even as the total number of bank branches has been increasing, the number of rural bank branches has declined from 35,134 in 1991 to 30,572 in 2006. Some 73 per cent of farm households have no access to formal credit, with Scheduled Castes and Scheduled Tribes being the worst hit.

He further cites Aadhar Report on the issue stating a few challenges which remain in making banking truly accessible for the poor are:

1. Know your Customer Challenges (KYC): Even with reduced KYC norms, banks must corroborate the identity and address of a resident, before they get a bank account. Prospective customers applying for a no-frills account must consequently provide identity documentation or letters from local authorities verifying their identity and residence. These requirements make it difficult for many among the poor to get a bank account.

2. High Costs: Today, despite the network of 82,000 bank branches of commercial banks across the country, India’s banks cater to only about 5 per cent of the villages. The cost of this financial distance is paid by the poor. A visit to the bank for the poor often means substantial travel and expense, and the loss of a day’s wages. The poor find such costs especially untenable given their preference for micro-transactions.

3. Limited Accessibility: The costly processes of cash management, cumbersome identity verification processes and high transaction volumes create inefficiencies across the system and a web of delayed payments and long waiting times for the ultimate beneficiaries. The information asymmetry between the bank and the beneficiaries on when payments have arrived also gives rise to middlemen, who pass on this information to the beneficiaries for a price. The net cost that beneficiaries pay out to access their payments across Government schemes and social programmes is estimated to be in excess of Rs 6000 crore. These constraints prevent the poor from using banking services regularly.

4. Safety of Savings: The lack of access to banking services for the poor also makes the safety of their savings, which the middleclass takes for granted, a challenge. Due to the limited safety of savings stored at home, the poor resort to other means to ensure the security of their money, including converting it into investments in gold or livestock, or lending it to friends and family. The lack of access to institutional services for savings means that the poor pay a premium to private agents such as moneylenders to store their cash securely and ensure the safety of their money.

5. Challenges for Banks: In much of rural India, unbanked regions are those that are sparsely populated, which lack basic infrastructure, and where large numbers of small transactions is common. As a result, banks face high costs of customer acquisition; high potential transactions costs of micropayments; and large expenditures on infrastructure and IT.

Meanwhile, a report by Infosys suggested the following steps in addition to the policy measures already in place: It has been over the years that people do not always subscribe to beneficial plans and services. For example, low enrolment in the Pension Plan when it was optional. Financial Inclusion programme will be successful only when subscription to financial services is made mandatory for all citizens. Financial Inclusion will be more successful when social marginalisation in the rural areas is eliminated.

A book titled How India earns, spends and saves, authored byRajesh Shukla helps infurther understanding the significance of Financial Inclusion. It states that rural and urban households display some differences in their saving behaviour but there are more similarities than differences. While 87 per cent urban households put away some money for emergencies, only 81 per cent of rural households do so. More urban households (74 per cent) than rural ones (68 per cent) save for old age. Saving for purchasing large consumer durable items is observed among 29 per cent urban households as against 20 per cent rural households. Weddings, births, social events and ceremonies have special significance among Indian families, particularly rural ones as 64 per cent rural and 60 per cent urban households save specifically for this cause. An interesting finding was that as many as 79 per cent of rural households saved for education of their children.

The book highlights that there is a surplus income of nearly 23 per cent in rural households and 29 per cent in urban ones. A major portion of the surplus income (15 per cent to 19 per cent) is saved as cash, while about 6 per cent is saved in physical assets, such as consumer goods, jewellery, and so on, and only 2 per cent to 3 per cent goes as financial investments.

In terms of mode of saving, Shukla in his book said that urban households put nearly 63 per cent of their cash in bank accounts, while rural households save 45 per cent of their income as bank deposits. A much higher share of the savings is kept as liquid cash by rural households (41.7 per cent) than by urban ones (23.4 per cent).

Report on Indebtedness Among Rural Labour Households by Labour Bureau, Ministry of Labour and Employment reveals that most of the rural labour households prefer to raise loan from the non-institutional sources. About 71 per cent of the total debt requirement of these households was met by the non-institutional sources. Money lenders alone provided debt to the tune of about 44 per cent of the total debt. Relatives and friends and shopkeepers have been two other sources which together accounted for about 19 per cent of the total debt.

Another book titled Agrarian distress and indebtedness in rural India: Emerging perspectives and challenges ahead byHaroon Sajjad and Chetan Chauhan (Source: Journal of Geography and Regional Planning Vol. 5(15), pp. 397-408, November, 2012) says that at all India level, 48.6 per cent of farmer households were reported to be indebted (NSSO 59th Round, 2005). National Sample Survey Organisation defines a farmer to be indebted when, any liability which was taken in cash or kind and if the amount at the time of transaction was Rs 300 or more.

The reasons for indebtedness amongst farmers are many and one of the most important reasons is that farmers are not getting enough remuneration for their produce. This could possibly be because of a sharp deceleration in the growth of prices of many agricultural commodities and increase in the cost of cultivation after the introduction of reforms (Rao and Suri, 2006). Also the uncertainty of weather as well as dependence on borrowed credit from an informal moneylender is also another reason to add on. A direct outcome of the squeeze in farm incomes and dwindling employment opportunities has been a phenomenal rise in the level of indebtedness within the peasantry. The NSS 59th round Survey on “indebtedness of farmer households” conducted in 2003 reported that moneylenders had emerged as the most significant source of credit for the indebted farmers, with 29 per cent of farmers sourcing their credit from them.

A Report of the Expert Group on Rural Indebtedness (Source: Banking Division, Department of Economic Affairs, Ministry of Finance, Government of India, July 2007)states interest rates charged by the non-institutional agencies were much higher than those charged by institutional agencies for outstanding debt as on end June 2002(NSSO 2002). About 85 per cent of outstanding debt of cultivator households from institutional agencies was in the interest range of 12 to 20 per cent per annum. On the other hand, 36 per cent of cultivator households’ outstanding debt from non-institutional agencies was at the interest range of 20 to 25 per cent and another 38 per cent of outstanding debt at high interest rate of 30 per cent and above. This shows the exploitative nature of non-institutional credit market.

Borrowing for productive purposes in Madhya Pradesh (69.7) is higher than national average of 65.1 of total credit, the report says. Contrary to the general belief that there are more defaults of institutional debt compared to non-institutional borrowings, the recent development in the repayment profile of cultivator households shows marginally better compliance of institutional borrowings. During 2002-2003, in the case of institutional credit, cultivator households repaid 14 per cent of loans taken during the year and 49 per cent of the loans taken prior to that year. In the case of non-institutional sources, the corresponding proportions were 12 and 39 per cent.

Interestingly, another report, Challenges to Financial Inclusion in India: The Case of Andhra Pradesh (Source: Centre for Advanced Financial Research and Learning) authored by S Ananth and T Sabri Öncü1 says that an optimal strategy to expand financial inclusion would be through the expansion of the formal banking sector, especially the public sector banks. Although both the public and private sector banks are subject to the same prudential norms that give incentives to prevent adverse selection, we emphasise on the public sector banks because:

a) Public sector banks have much larger branch presence in the “unbanked” areas, especially if their regional rural bank branches are also included;

b) Despite its potential problems, political presssure, especially at the district level, is much higher on the public sector banks than on the private sector banks;

c) Public sector banks play a much larger role in Government sponsored schemes, especially those that are subsidy linked.

SHG-Bank Linkage programme had disbursed more than Rs 7,800 crores in 2011-2012 against approximately Rs 1,000 crores in 2000-2019. When the SHGs were classified as a priority sector and included in the Priority Sector Lending programme of the RBI through which banks are required to make a certain percentage of their disbursals to the priority sectors, making loans to the SHGs through the SHG-Bank Linkage programme proved to be “profitable” to the banks in more than one way. An unintended offshoot of nurturing this extensive network of SHGs was the increased realisation that the poor comprise a profitable, albeit an unmapped and nascent, market, especially when they are organised effectively.
What PM Modi said about the scheme:

1. Scheme to boost everyone’s confidence

2. Jan Dhan Yojna creates record, says Prime Minister

3. Bank Accounts will boost the economy

4. More than 1.5 crore insured is a record, says Prime Minister Narendra Modi

5. Jan Dhan Yojna will end economic untouchability

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