Nobel laureate Amartya Sen, in his book ‘Development as Freedom’, referred to Mary Wollstonecraft’s classic ‘A Vindication of the Rights of Women’, in which she outlined the general programme of ‘vindication’. The rights she spoke about, Sen writes, included not only those “related to the well-being of women (and the entitlements that were directly geared to promote that well-being), but also the rights that are aimed mainly at the free agency of women”.

Financial inclusion deeply resonates with Sen and Wollstonecraft’s views. It has the characteristics of the entitlement that comes with the different social welfare programmes and, at the same time, has traits of an initiative meant to ensure free agency of women – and men, and the capability building approach favoured by Sen.

Timeline for financial inclusion in India

1904: Enactment of the Cooperative Societies Act and subsequent establishment of the credit cooperatives

1954: All-India rural credit survey organised and following its recommendations financial inclusion efforts were intensified

1955: Nationalisation of the Imperial Bank of India and its conversion to State Bank of India

1969: Nationalisation of 14 major commercial banks

1970: The lead bank scheme was launched

1975-76: Regional rural banks (RRBs) were established following the recommendations of the report of the Narasimham working group

1978: The integrated rural development programme (IRDP) was launched

1980: Nationalisation of six more commercial banks

1999: The swarnajayanti gram swarozgar yojana (SGSY) was launched based on the selfhelp group (SHG) model

2004: RBI set up a committee under HR Khan to study different aspects of rural credit. RBI instructed the banks to make available a basic ‘no-frills’ banking account to achieve greater financial inclusion

2005: For the first time the term ‘financial inclusion’ was used in the annual policy statement presented by RBI governor Y Venugopal Reddy

2008: The committee on financial inclusion headed by C Rangarajan submitted its report and suggested that each branch of PSU banks should open 250 new accounts every year

2014: Launch of the Pradhan Mantri Jan-Dhan Yojana (PMJDY)

Sen and Narendra Modi are not known to be endorsing each other’s views, but the economist would be excited about the way the prime minister has set out to put this idea into action, creating a world record along the way. Announcing the ‘Pradhan Mantri Jan-Dhan Yojana’ in his Independence Day speech, Modi said, “I wish to connect the poorest citizens of the country with the facility of bank accounts through this yojana. There are millions of families who have mobile phones but no bank accounts. We have to change this scenario.” 

The idea of financial inclusion, of course, is not new. Indira Gandhi pushed it with bank nationalisation (see box), and in recent years UPA focused on it. What is new is the energy put behind the idea.

Here is one indicator of it: the first target in the scheme was to open 7.5 crore basic accounts by January 26 – a tall target indeed, considering that 24.3 crore basic accounts were opened between 2005 and March 2014 – and yet the target was achieved a month before the deadline, creating a world record. “No mean feat,” wrote the prime minister in a letter to the bankers lauding their efforts. Soon, at least one individual from nearly every household in the country had a basic account.

Beyond the numbers, however, what matters is that financial inclusion is, to use a cliché, not a game changer but a life changer. (PMJDY’s tagline is ‘Mera khata, bhagya vidhata.) What Wollstonecraft and Sen envisioned is happening across the country. Be it Shobha and Rakhi from Mewat in Haryana or Purnalaxmi  and Suku from Mandwi in Tripura (see ground reports in this edition), women and men have been receiving support from banks for their small entrepreneurial ventures and changing their lives. A silent revolution is underway.

Of course, much remains to be done, which is understandable, given the limitations of the banking network even today.

Why financial inclusion matters

In December 2014 the National Sample Survey Organisation (NSSO) released the findings of its countrywide household survey. It found that 52 percent of households in the country were in debt, with levels of indebtedness varying from 93 percent in Andhra Pradesh and 82.5 percent in Tamil Nadu to 37 percent in Chhattisgarh and 17.5 percent in Assam.

MUDRA Bank: Next step in financial inclusion

In the second big step in ensuring financial inclusion, the PM launched the Micro Units Development Refinance Agency (MUDRA) Bank on April 8. It will provide credit of up to '10 lakh to small entrepreneurs and act as a regulator for ‘micro-finance institutions’ (MFIs).

The bank comes under the PMJDY and it will frame policy guidelines for micro enterprise financing business and registration of MFI entities as well as their accreditation and rating. It will also lay down “responsible financing practices” to ward off over indebtedness and ensure proper client protection principles and methods of recovery, besides development of standardised set of covenants governing last mile lending to micro enterprises.

There are about 5.77 crore small business units. They find it difficult to access credit from the regular banking system. This is where MUDRA Bank comes in. It will nurture small businesses through different stages of growth and development of businesses termed as Shishu, Kishor and Tarun:
Shishu: This is the first step when the business is just starting up. The loan cover in this stage will be up to '50,000.

Kishor: In this stage business, the entreprenuer will be eligible for a loan ranging from '50,000 to '5 lakh.

Tarun: This last stage of growth envisages loans for upto '10 lakh.

In revealing the sources of the credit and corresponding indebtedness, the survey highlighted the high dependence – at around 40 percent – on informal and non-institutional channels of finance. Moneylenders known for charging exorbitant rates contributed 26 percent of the rural credit. The rural households with marginal landholding came out to be the biggest area of concern, as only 15 percent of their credit came from institutional sources.

Thus, the question is how will the PMJDY accounts help people gain the benefits of formal banking. The opening of accounts was akin to infrastructure building and the real challenge lies ahead in ensuring that these accounts are used by people, by providing them appropriate instruments of financial services.

Indira Iyer, senior fellow at the National Council for Applied Economic Research (NCAER), writes in a research paper, “Both the lack of access and the lack of demand are more acute in rural areas. With the growing commercialisation and modernisation of Indian agriculture, the credit need in rural areas is now far greater than before. Without formal access to credit, the rural moneylenders, now posing as suppliers of input of consumer goods for owners of the land, will still continue to have a firm hold on rural credit.

“There is a need to improve the supply side of credit with more specific and innovative instruments. For instance, banks could create venture capital funds on a small scale to finance first-time entrepreneurs. This would reduce risk for the entrepreneurs and the need for them to look for informal sources of finance at high interest rates,” she adds. (Also read, interview with Iyer in this edition).

As the majority of the accounts opened under the scheme belong to the rural poor, only products that suit their requirement will help realise the true potential of the scheme. According to the NSSO and the NCAER surveys, majority of the rural households do not save and invest and are inclined towards availing credit from informal sources in times of financial hardships. “For this class of the poor, a more comprehensive risk management and poverty alleviation programme, together with a push towards greater financial literacy and access to financial services, is essential,” adds Iyer.

Apart from making proper financial instruments available, there are other pressing concerns that need to be addressed if the scheme has to be made a success in real terms. These include high incidence of dormant accounts, managing overdraft facility in a way that it serves its purpose of providing easy credit and at the same time does not put any strain on banks. A few others are related to the business correspondent model and financial literacy.

Making accounts active

Ensuring regular use of the accounts became a major concern for the government. RBI chief Raghuram Rajan, within a month of the launch, reminded bankers that the objective of the scheme was “universality, not just speed or numbers”. What he meant was, if the accounts were not used regularly it would lead to dormancy, which, in turn, would defeat the purpose of the scheme.

What RBI has done to ensure financial inclusion

1. Advised all banks to open basic savings bank deposit accounts with minimum common facilities like no minimum balance, deposit and withdrawal of cash at bank branch and ATM s and receipt/credit of money through electronic payment channels.

2. Relaxed and simplified KYC norms, especially for small accounts with balances not exceeding '50,000 and aggregate credits in the accounts not exceeding '1 lakh a year. Advised banks not to insist on introduction for opening accounts. In addition, banks are allowed to use Aadhar card as a proof of both identity and address.

3. Simplified the branch authorisation policy to address the issue of unevenly spread bank branches. Domestic SCBs are permitted to freely open branches in tier-2 to tier-6 centres with population of less than 1 lakh under general permission, subject to reporting. In the northeast, domestic SCBs can open branches without any permission from RBI. With the objective of further liberalising, general permission to domestic scheduled commercial banks (other than RRBs) for opening branches in tier-1 centres, subject to certain conditions.

4. Directed banks to allocate at least 25 percent of the total number of branches to be opened during the year in un-banked (tier-5 and tier-6) rural centres.

5. Opening of intermediate brick and mortar structure, for effective cash management, documentation, redressal of customer grievances and close supervision of BC operations, banks have been advised to open intermediate structures between the present base branch and BC locations. This branch could be in the form of a low cost simple brick and mortar structure consisting of minimum infrastructure such as core banking solution terminal linked to a passbook printer and a safe for cash retention for operating larger customer transactions.

6. In June 2012, guidelines on financial literacy centres (FLC s) were revised. Accordingly, it was advised that FLC s and all rural branches of scheduled commercial banks should scale up financial literacy efforts through outdoor financial literacy camps at least once a month, to facilitate financial inclusion through two essentials, financial literacy and easy financial access.

Finance minister Arun Jaitley, however, assured that most of the inactive accounts would become operational with the introduction of direct benefit transfer (DBT) and asserted that these account holders will show to others the benefits of the cashless system. Indeed, thanks to the DBT, the proportion of dormant accounts dropped from 76.81 percent  in September 2014 to 57.9 percent in March 31, 2015.

While the issue regarding the persistence of zero balance accounts leading to a large number of dormant accounts is a valid concern, experience has shown that with the spread of financial literacy, people can be motivated to use these accounts.

Canara Bank, for example, could restrict its share of zero balance accounts at 38 percent with the help of financial literacy and other initiatives. The bank said in a statement, “Explaining them the advantages of saving regularly in banks, availing other banking facilities like remittance, loan, etc., for improving their life standards” and “through various initiatives like street plays, radio jingles, media publicity, jumadi announcements, hoardings, wall paintings in strategic locations, a conscious and strategic financial awareness was created in the minds of the people which led them to understand the importance and benefits of having bank accounts and operationalising the accounts”. It added that during the awareness camps, people were made to understand that benefits of DBT would flow only through their bank accounts and they were exhorted to understand the importance of saving, creating wealth, and building banking history for themselves to avail other benefits from banks in future.

Overdraft facility

Under the scheme, an account holder becomes eligible for a Rs 5,000 overdraft six months after opening the account, if its operation has been “satisfactory”, meaning there have been transactions through the account. While the finance minister asserted that the overdraft can be used as an instrument of microfinance, the banks already grappling with rising bad loans were apprehensive that a hasty grant of overdraft might lead to a situation where a large number of defaults might put further stress on the banking sector. A similar scheme launched in Mewat in 2011 had failed badly. Banks have thus requested the finance ministry to quickly set up a credit guarantee fund to cover possible delinquencies in the overdraft they extend to the PMJDY account holders. According to the original plan, such a fund is promised in the next phase, which will begin on August 15, 2015.

Banking network

To keep the new accounts active, and also to provide services to them, banks will have to reach out to people. That is where the banks face constraints. The banks – largely public sector ones – have achieved the record-making feat with no increase in staff or infrastructure, but now servicing the new accounts will test them. The new accounts can be a business opportunity or they can be a social obligation, depending on the bankers’ viewpoint.

The 2011 census states that although 70 percent of Indians live in rural areas, only 37 percent of total bank branches in the country are located there. In this scenario, the role of business correspondents (BCs) becomes very important as they can bring the bank to the doorsteps of the public. Since its inception, the BC model has helped banks cover more than 2,00,000 villages (37 percent of total villages in the country). However, the BC model is grappling with some major issues, the most prominent being the lack of incentive and trust deficit. 

As per an InterMedia India FII Tracker Survey in 2013, only 3 percent households fully trusted BCs with their money. “Coupled with this is the fact that 47 percent BCs are not traceable after they opened bank accounts, the reason being obvious for 80 percent to 96 percent of accounts opened by BCs lying dormant,” says Iyer.

Another reason for the poor state of the BC model is the lack of proper monetary incentive, which makes people work as BCs only as a stop-gap arrangement (till they get a better job) or as an additional work (to supplement their income from other sources).

Acknowledging the problems faced by BCs, the finance ministry held a meeting with the representatives of public sector banks and BCs on April 7, where issues, such as BCs’ remuneration, technical support and the necessary incentives, were discussed.

Reforming the BC model has been necessitated more by the fact that with crores of new account holders, there is immense pressure on banks. In this scenario, only efficient BCs can help in easing some pressure off the banks. Technology, of course, can fill the gap to an extent. The next phase of PMJDY also considers using the extensive postal network for financial inclusion.

Social welfare

Extending the social welfare objective of the PMJDY, the government in May launched three more social security schemes: the Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) that would provide insurance cover at the most affordable rates (with premium as low as Rs 330 a year or less than Re 1 a day), while the Atal Pension Yojana (APY) would address old-age income security needs.

Meanwhile, however, the insurance provision built in the PMJDY is facing teething troubles. There have been numerous instances where the only motivation for getting a bank account was life and accidental insurance cover that came with the opening of the account. Under the PMJDY, the account holders are given Rs 30,000 insurance coverage if they comply with certain specifications of the scheme which include opening an account by January 26, 2015 and having an accidental insurance cover of over Rs 1,00,000. However, recent data reveals something which can hardly seem to be a motivating factor any more. According to the department of financial services, the total number of accidental insurance claims received was 174 (till April 15, 2015), out of which 79 have been settled. Further, a total 158 claims under life insurance were received by the department, out of which 93 have been settled. The insurance provision has shown almost no results (see box), due to several riders.

While covering 100 percent households within a short span of five months was not a mean task, the real challenge lies in keeping these accounts operative. “The onus is primarily on public sector banks to open the bank accounts. There is a cost to opening and maintaining accounts. If people use the accounts, it will pan out in a way that it would be beneficial for both, people and banks. But if they are going to lie dormant, it will, of course, create financial stress,” said Iyer.

The next phase

The story of financial inclusion in general and the PMJDY in particular has revealed strengths and weaknesses of the banking sector. The next phase of PMJDY, from August 15, 2015 to August 15, 2018, will take stock of them. The mission document has micro-level plans, focusing on small villages and areas (hilly, tribal, inaccessible) barely touched so far. More importantly, the next phase should reveal a larger financial inclusion architecture that will also factor in regional rural banks (RRBs) and microfinance institutions (MFIs), apart from commercial banks.

shishir@governancenow.com

(The article appears in the June 1-15, 2015 issue)