The new government’s announcement of implementing financial inclusion (FI) in a mission mode along with the big-bang launch of the Pradhan Mantri Jan-Dhan Yojana (PMJDY) on August 28 produces a lot more focus on an important poverty alleviation measure. In the first few days of the unveiling of the yojana, according to press reports, nearly 2.8 crore new accounts have been opened and `200 crore mobilised. The target of at least having an account in each household of India by January 26, 2015, implying opening of 5 crore more accounts seems easily achievable now.
Historically, the government of India and the Reserve Bank of India (RBI) have been making concerted efforts for more than six decades to increase banking penetration since the nationalisation of the State Bank of India in 1955, and commercial banks in 1969 and 1980. Since July 1982, the National Bank for Agriculture and Rural Development (NABARD) has also made significant efforts to increase FI. The situation had marginally improved since 2008, with the introduction of business correspondents (BCs), provision of no-frill accounts, easing of know-your-customer (KYC) norms, support extended to self-help and joint liability groups, and other micro-finance institutions, and instituting kisan and general credit cards. Despite such efforts, nearly half of the country did not have recourse to credit from formal banking channels.
The challenges in successfully continuing with the PMJDY would be many despite the fact that government officials, at district level as well as at panchayat raj institutions have also been made responsible. These challenges can be summarised into institutional and other factors. The institutional challenges are shortage of skilled manpower, problems in the BC model, and frequent problems with connectivity and lack of uniform application of technology across banks hampering seamless experience that impacts confidence of customers in formal banking. Further, as generally observed, public sector banks are leading the initiative and therefore the synergy and strategy that the private sector could have provided is largely missing. Initially, as these accounts will record one-way movement of money from government under various direct benefit transfers, cost of operations could increase implying a negative impact on profitability of banks. Other important challenges could be long time taken for credit appraisal and loan disbursal, and lack of customised and diversified financial products to meet the requirements of local population.
The unprecedented opening of accounts in a record time under PMJDY has raised some basic questions. First, would the insurance incentive be restricted to only those who have opened an account after August 28 and would this encourage existing account holders, to open and operate only fresh accounts? Second, how will the accounts be serviced and how would the government monitor such mammoth operations? Should the government set up another Development Finance Institution (DDFI)? On the face value, proposal to have a dedicated DFI, even on a short-term mission mode, for a focused approach to eliminate financial “untouchability” as was attempted by India in the fight against polio, seems logical. After all, Industrial Development Bank of India, Small Industries Development Bank of India and NABARD were set up for specific purposes and yielded desired results. An in-depth analysis will reveal that cost factor and last mile delivery, main issues of financial exclusion, may still not be addressed by setting up a DDFI. It is well known that any financial institution would generally base their lending rate decisions on three criteria—cost of funds, transaction costs and the required spreads. The cost of setting up a DDFI and required investment in terms of skills and training, along with the incubation period may be very large to yield encouraging results. In contrast, it may be useful to leverage the investments already made by NABARD and RBI in FI with their existing widespread network of regional offices.
However, a High-Powered Monitoring and Evaluation Cell (HPMEC), operating in the ministry of finance could serve a very useful purpose. HPMEC could be assigned responsibility of monthly reporting and public dissemination of information, on progress of FI, collected from specially designated officials in regional offices of NABARD and RBI, with the accountability of supplying, state- and district-wise, statistics on the performance of banks in opening accounts, and number of transactions, bank-wise, in newly opened accounts. The HPMEC compared to a DDFI would be more efficient and cost effective in ensuring results for the government in extending financial services to the unbanked.
Instituting more banking ombudsmen could help address the teething problems and stabilise the scheme. Further, to make the FI truly effective, there is need to examine the institutional arrangements at the ground level. A limited experiment done in Gubbi taluk in Tumkur district of Karnataka has shown that many of the current problems like lack of confidence in BCs among the population, accessibility, connectivity, etc. could be easily addressed through a set-up like common service centre at the panchayat level which would be similar to a bank branch facility sans the cost involved of a brick-mortar branch. The performance can then be technologically tracked through geographical and appropriate management information systems.
Since August 28, renewed vigour has been noticed on financial literacy (FL) in terms of advertisements in print and electronic media. The FL campaign needs to explicitly mention that loans from formal sources are available on lower rates of interest and easier instalments. The objective of FL should be that unbanked population begins to recognise the trade-off between ease of raising money and rate of interest to wean it away from informal source of resources.
The objective of FI is to extend formal financial services to a large unbanked population to unleash the growth potential and attack poverty. The opening of bank accounts directly and incentivising through the insurance scheme clearly shows that FI is an important priority for the government. The nation is hopeful that the mission will be successfully accomplished given the commitment of the PM and dedicated pursuit of the new government.
Charan Singh is RBI chair professor, IIM Bangalore, and former senior economist, IMF.
Gopal Naik is a professor at IIM-B