Narendra Modi Six Months -Jan Dhan Yojana, an appraisal

Prime Minister Narendra Modi completes six months in office with a variety of mission interventions and some structural changes. It has been less than three months since the Government launched the Pradhan Mantri Jan Dhan Yojana As of November 21, more than 7.87 crore bank accounts had already been opened under the scheme with more than Rs 6200 crores deposited in them. The broad target of the scheme – 7.5 crore bank accounts – has been met two months before the schedule. The Jan Dhan Yojana is not the first programme for financial inclusion but it has definitely been the most effective. A major reason for this is that as opposed to the Congress- Swabhimaan programme, the PMJDY is a national level drive run in a mission mode and accompanied with a massive outreach and awareness programme. The real scale of the success of the first stage of PMJDY is seen when one compares it to the performance of the previous Government. The graph below shows how it took three years for UPA II to open 11 crore Basic Saving Bank Deposit accounts.

A major break from the past has been the relaxation of KYC norms for these accounts. Opening a bank account was not only simplified but also incentivised through accompanying benefits like free accidental insurance, life insurance and overdraft facility. Despite achieving the 7.5 crore target, there is long way to go before one can safely say that the objectives of the Jan Dhan Yojana have been achieved. The immediate target for the banks and the Finance Ministry is to ensure that all account holders manage to get their RuPay cards and maximum numbers of accounts are linked to Aadhar cards. This is necessary for rolling out the additional benefits like insurance and the overdraft facility which were attached to the bank account.

I would now like to discuss some pointers related to the Jan Dhan Yojana which would determine how the scheme performs in the future and whether the government is able to achieve the real objectives of Jan Dhan Yojana – financial inclusion and unleashing the plethora of positive externalities that the scheme potentially holds.

  •  With the demand side of the equation taken care of with this massive drive for opening bank accounts, there is now need to create a supply of banking services. The strategy of the Modi Government to first create a ‘demand’ seems to be break from the attempts of the previous Government which spent years trying to expand the banking correspondent network, increase rural branches of major banks and expand ATM coverage in rural areas. The strategy was a massive failure as the Government probably failed to account for the absence of any major incentives for banks to operate in rural areas. Why would an educated rural youth want to become a Banking Business correspondent when no one in his village has a bank account? Allowing zero balance holdings enables a large number of people to hold accounts. The concerns of the banks regarding high operation costs would be taken care of if the Government is able to increase transactions in these accounts. Average revenue per account holder might be low considering the financial background of these account holders and the number of zero balance accounts but one can confidently say that like everything in India, sheer numbers would drive up the aggregate holdings and ensure that the PMJDY doesn’t become a liability for the banks. This said the Government should now launch a drive to expand the Business Correspondent network in the country. The BC network can be a major employment avenue for youth in rural areas with a low density of bank branches. The Government should make BC training a part of its larger skill development programme.
  •  In the last few weeks, there has been a lot of concern in the media about the high proportion of zero balance accounts. While the proportion is indeed high at 75 percent, I don’t think it should be such a major worry at this stage considering that the scheme is just three months old. While low financial literacy and absence of banking infrastructure are important reasons for this and need to be addressed by the Government immediately, what is most important is to overhaul the culture of savings in India. Even though India has had a high savings rate, low financial inclusion has forced rural India to hold their savings in the form of jewellery and property. This is precisely what the PMJDY needs to change. People must realise that money required for short term needs can be saved in the bank. A bank account eliminates the need to hold a large amount in cash at home or convert it into physical assets for safety reasons. As the supply side problems are sorted and banking is made easy with greater financial literacy, one can hope for a change in this culture.
  • Apart from the intrinsic and direct benefits of bringing millions of low income households into the formal banking system, the PMJDY would greatly facilitate the shift from physical subsidies to cash transfers. The UPA Government had launched the Directs Benefits Transfer Scheme with much fanfare in early 2013. The scheme which was scaled up to 291 districts for the transfer of LPG subsidies and payments for various scholarship schemes was disbanded by the Cabinet due to poor ground implementation. The Modi Government has announced that it would re-launch the DBT programme in January 2015. The big difference with DBT would be that it would be launched with much wider coverage of formal banking. A big challenge for the Government though in this regard is the poor seeding of Aadhar numbers. Overall less than one third of the accounts (32 percent) have been seeded with Aadhar numbers. Successful implementation of DBT would solve the problem of zero balance accounts as many of these accounts would start getting subsidy deposits from the Government. Deposit of subsidy amount by the Government would automatically induce transactions in these accounts. Success of Direct Benefits Transfer is quite important for the Government as changeover of subsidies to cash transfer can greatly reduce the subsidy bill of the Central Government. Cash Transfers are probably the only way of implementing targeted subsidies. In a recent statement, Chairman of the Food Corporation of India revamp Committee, senior BJP leader Shanta Kumar said that providing conditional cash transfers in place of subsidized grains can lead to an annual saving of at least 30,000 crores. Thus, any expenditure incurred by the Government in implementing JDY should be looked upon as an investment.

Looking ahead, the Government must ensure that it is able to build on this momentum and successfully implement the second stage of the scheme. Financial Inclusion can become a gateway to social inclusion as the Jan Dhan Yojana can pave the way for micro insurance schemes, social security for disadvantaged groups and cheap credit for the economically weaker sections in the future.

Courtesy Niti Central


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