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A Step Towards Effective Financial Inclusion

By Rahul Trivedi
In Financial Inclusion
January 13, 2015
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As per a recent report of KPMG-CII, India’s banking and financial sector is expanding rapidly. It has potential to become the fifth largest banking industry in the world by 2020 and the third largest by 2025. Prime Minister Narendra Modi’s ambitious project Pradhan Mantri Jan Dhan Yojna has added spark to it.

jandhan Banking in the rural areas was once a dream, but in last couple of decades this dream has come true. The growth of banking sector gained more pace following the passing of the Banking Laws (Amendment) Bill by the Indian Parliament in 2012. The bill  allows the Reserve Bank of India (RBI) to make final guidelines on issuing new licenses, which could lead to more banks operating in the country.

Currently, the Indian Banking industry, which is worth Rs. 81 trillion, comprises of 26 public sector bank, 20 private sector banks and 43 foreign banks along with 61 regional rural banks (RRBs) and more than 90,000 credit cooperatives. With the usage of latest technologies like internet and mobile devices to carry out transactions and communicate with the masses, the industry will surely grow leaps and bound.

Government Initiatives
Financial Inclusion is one of the top most priorities of the government. Exclusion of a large number of people from any access to financial services inhibits the economic growth of the country. There is also evidence that financial inclusion is crucial to poverty reduction.

The earlier campaign on financial inclusion started in 2011 had a limited objective. Christened ‘Swabhimaan’, was one of the initiatives taken by the UPA Government but it couldn’t gain the momentum needed. The focus was on the coverage of villages with population of 2,000 or more with banking services. Coverage of individual households with bank accounts was not the focus. Out of the 5.92 lakh villages in the country, only 74,000 villages could be covered then.

With the formation of new government, Prime Minister Narendra Modi in his first Republic Day speech announced the Pradhan Mantri Jan Dhan Yojna. With the focus to provide banking to all, this initiative gained momentum and as a result, over 1 crore accounts were opened as on 28/08/2014 for which preparatory work was started from 16/08/2014 and stepped up from 25/08/2014. Banks were asked to organize mega account opening camps on the day of the launch and thereafter at each rural and urban branch in the district in coordination with District Authorities for opening of bank accounts.

There are some difference in operational level as well. The major shift in this program is that households are being targeted  instead of only villages as targeted earlier. Moreover, both rural and urban areas are being covered this time as against only rural areas targeted earlier. The present plan pursues digital financial inclusion with special  emphasis on monitoring by a mission headed by the Finance Minister.

In order to increase the ease of access, a platform has been built by National Payment Corporation of India (NPCI) that connects all the banks and all the telephone network operators in the country. The platform helps a customer or any bank to access his/ her account with any type of mobile handset. And for this, a costly smart phone is not necessary. Even with an ordinary handset, services like balance enquiry and money transfer is possible. The business correspondent of banks can also use the services to support cash deposit and cash withdrawal. As many as 26 Public Sector Banks and 3 Private Sector Banks have joined this platform. Other ould also join soon. Full range of banking services would now be possible thorough ordinary mobile phones.

Benefits
Prime Minister Narendra Modi started this ambitious project to help the poor become more financially confident and allow every citizen the right to have their own bank account and insurance coverage which was previously impossible for most of the population under poverty.

Some of the benefits which this scheme would provide to the new account holders are listed below.

Life insurance Benefit:
Under the PMJDY scheme the account holders will be given worth Rs.30,000 insurance coverage if they comply with certain specification of the scheme which includes opening an account by January 26, 2015 and having an accidental insurance coverage of over Rs. 100,000.

Loan benefits:
The account holder can take loan benefit of up to Rs. 5,000 from the bank after six months from opening the account. Though  the amount might seem insignificant for many but we have to realize the scheme is directed mostly towards people below the poverty line and who are struggling desperately to sustain their everyday living. The loan benefit can be useful for those who want to use it for farming or other agricultural purpose.

Mobile banking facilities:
Though the technology of using smart phones to conduct our bank transactions is not novel anymore but the PMJDY scheme will allow its account holders to avail the same facilities of checking balance and transferring funds through a normal cell phone which is more affordable to the general economy.

jandhan-campHowever, questions remain
The program is quite ambitious in its scale and as such, would require enormous effort to pull through. For example, each of the new bank accounts is to come with a RuPay debit card, Rs. 5,000 overdraft facility, Rs. 1 lakh accident insurance and Rs. 30,000 life insurance. Keeping these accounts running, the insurance-claim system functional, funneling money through cash transfer mechanisms and making the overdraft facilities financially viable will imply costs for different financial sector actors.

Another challenge is to meet the deadline which has been pegged at January 26, 2015 as against August 2015. According to the bank and insurance executives, it is a herculean task. With an ambitious target of opening 75 million bank accounts, banks face a daunting task on three counts; scaling up operations, financial literacy and managing the business correspondents (BCs) ecosystem, a senior banker lamented. He also added that the dependence on BCs is going to be higher with use of micro automated teller machines (ATMs). The last-mile connectivity and delivery of services are crucial factors to work on.

To begin with, HDFC ERGO will be the insurance company providing the cover for the RuPay card offered under the Jan Dhan Yojana. This plan will cover accidental deaths if the card is swiped within 45 days of its issue and is in an active state. But going forward, a life cover of Rs 30,000 will be provided by Life Insurance Corporation (LIC) of India. This life insurance cover will be given to all customers who open a bank account before January 26, 2015. Accidental insurance would be provided by state-owned general insurance  companies, subject to some conditions.

Some technology issues such as offline transactions and lockin to a particular vendor had hampered further scalability of the previous campaign. Even in online accounts, the server was kept separately, preventing the account holder from operating the account from locations other than with a BC.

On the other hand, insurance sources said there were challenges of managing duplication of accounts. Banks are integrating their systems to ensure that one person does not open multiple accounts, which could have problems related to claims processing.

Despite progress on the opening of bank accounts, access to credit still lags. Credit is highly skewed towards big cities. Personal loan accounts (55 million), the single largest category of credit accounts, outnumber agricultural loan accounts and the vast majority of these accounts are in metropolitan cities as per the data. Delhi alone accounts for 13 per cent of all of India’s outstanding credit.

A 2008 report of the C. Rangarajan Committee on Financial Inclusion showed that in 256 districts of India, over 95 per cent of adults did not have bank loans. “There are two aspects to financial inclusion: one is bank accounts and the second is access to credit. The scheme announced by the Prime Minister addresses the first problem. The issue of making credit available to small borrowers remains,” said Mr. Rangarajan, the former Chairman of the Economic Advisory Council to the Prime Minister.

It was not concerns over the creditworthiness of the poor which were holding banks back from extending credit, Mr. Rangarajan said. “Currently, our banks are meant to be equipped to disburse loans of millions of rupees and also a few thousand rupees. What is needed is a reorganization of the structure of banks,” he said.

The Yojana is being monitored in a Mission Mode with the Finance Minister being the Head of the Mission. It is estimated to cover 7.50 crore households with at least one account under the Yojana and also a large number of dormant accounts would be activated. Electronic Transfer of subsidies under various schemes of Government would be enabled. All such initiatives seems to have given the much needed momentum to the Yojna and the countrymen can hope to get the banking facilities in the remote areas with much ease.

Gender gap
There is also a significant gender gap in banking; by 2012, for every 1,000 deposit accounts opened in the name of men, just 394 were opened in the name of women. Chhattisgarh, West Bengal, Madhya Pradesh, Maharashtra and Gujarat were even worse than the national banking sex ratio, while Delhi and the four southern States were better.

Under the scheme
Account holders will be provided zerobalance bank account with RuPay debit card, in addition to accidental insurance cover of Rs. 1 lakh (to be given by ‘HDFC Egro’). Those who open accounts by January 26, 2015 over and above the Rs 1 lakh accident, they will be given life insurance cover of Rs 30,000(to be given by LIC).  After Six months of opening of the bank account, holders can avail Rs 5,000 overdraft from the bank.

With the introduction of new technology introduced by National Payments Corporation of India (NPCI), a person can transfer funds, check balance through a normal phone which was earlier limited only to smart phones so far.

Mobile banking for the poor would be available through National Unified USSD Platform (NUUP) for which all banks and mobile companies have come together