India’s Financial Inclusion Mission Success and Sustainability
It was an ironic twist of fate when a former Governor of the Reserve of Bank of India was unable to open a bank account in Hyderabad where he had settled down after retirement. The reason was onerous residence proof requirement under the Know Your Customer (KYC) norms that he himself had piloted as Governor.
He could however perhaps take comfort in the fact that even by mid-2014, only 42 per cent of Indians in the age cohort 15 plus had bank accounts as per the Global Findex. The numbers for those covered by insurance and pension schemes was below 10 per cent and less than 5 per cent of the adult population was invested in the stock market. Clearly, the scale and size of the formal financial sector in India was not commensurate with its economic growth requirements of double-digit growth and generation of 10-15 million new jobs every year.
In August 2014, the launch of the Prime Minister’s Jan Dhan Yojana (PMJDY) signaled the intent of the new government to give highest priority to financial inclusion – setting and achieving ambitious targets of covering every eligible un-banked household with at least one bank “no-frills” account populated with credit card and accident insurance products in the very first phase. The response from the banks was tremendous – and the target of universal coverage was achieved by the end-January 2015, ahead of the original deadline of August 2015.
The criteria of Scope, Scale and Innovation need to be taken into account while evaluating the success of a large public intervention.
With regard to Scope – relevance of focus and targeting the appropriate population segment, PMJDY has been as successful as its predecessor Swabhimaan (Self-Esteem) scheme which identified financial inclusion as an important tool for growth as it links hitherto un-served households to the formal financial system, and inculcates savings habit among them – this widening the stock of credit and savings simultaneously while prompting “economic citizenship for all”. As the RBI paper of 2006 mentioned: “It is universally agreed now that Financial Inclusion helps build domestic savings, bolster household, domestic and financial sector resilience and stimulate business and entrepreneurial activity, while exclusion leads to increasing inequality, impediments to growth and development. Hence, Financial Inclusion or inclusive banking is a precursor for inclusive and sustainable economic growth.”
The fact that the new government continued the focus of the previous regime’s initiative highlights its commitment to continuity and predictability – vital for investors and implementers alike. At the same time, it realised that it is important to go beyond guidelines and targets and focus on rigorous implementation so that the vision of universal access to financial services and products could be realised. Therefore, the bank-led model of financial inclusion was bolstered by a PMO-led mission mode under PMJDY.
The PMJDY, by all accounts is a spectacular success when measured on the yardstick of Scale. As mentioned earlier, it has met and surpassed its set targets but also sustained achievements in its first year. It is well-known that there is a tendency for no-frills or zero-balance bank accounts to become inactive – the evaluation of Swabhimaan had shown that only 42 per cent of such accounts had stayed active. While, the year-end evaluation of PMJDY is yet to take place, current reports from Scheduled commercial Banks (OBC and SBI) indicate that at least 72 per cent of the no-frills accounts are active. The drastic reduction in relapse or dormancy indicates that the mission-mode approach has placed an order of priority for financial inclusion that was missing earlier. The new difference is surely on account of practical focus on implementation and “getting the job done” that augurs well for India’s growth prospects.
With regard to Innovation – the revision of earlier guidelines is backed up by a push on appropriate financial products going beyond credit and savings services. The introduction of new schemes for pension and insurance linked to PMJDY accounts is a game-changer as it caters directly to the hitherto un-met needs of universal social security – earlier languishing at single-digit percentage figures. It is estimated that a mere doubling of the current coverage of insurance and pension can expand the formal financial sector and add a percentage point to India’s growth rates.
Clearly, the performance of PMJDY has been impressive not least on account of the fact that it focused on a frenetic pace of implementation while retaining the basic pillars of previous programmes and adding value through innovative products. Above all, the public display of political will behind PMJDY has been a great driving force and cause for success.
The continued success of PMJDY depends upon not only continued political will at the highest level, but also upon a renewed focus of sustainability – in terms of cost, capacity and linkage with wider financial sector reform and ease of business.
At the recent Gyan Sangam (Knowledge Confluence) hosted by the Finance Ministry at the National Institute of Banking Management, it was pointed out that administrative cost for each new account was INR 650 (USD 10) approximately – translating into an overall annual cost of INR 13,000 crore (USD 2 billion). Clearly, the use of technology and big push on mobile banking and payments banks would bring this cost down and ensure that PMJDY is a robust economic empowerment programme devoid of a subsidy discourse.
Intermediate linkages – not only with the Direct Benefits Transfer scheme enabled by Aadhaar – with large development funds at district level (amounting to an average of INR 650 crore or USD 100 million per district per year) can ensure this, provided reform in priority sector lending enables it. Building capacity for financial inclusion therefore has to be a key policy priority as also leveraging latest technology solutions globally and customising them to the Indian context.
In sum, a comprehensive approach to financial inclusion has been pioneered in India and requires capacity and reform to be sustained. Meanwhile, no retired Governor of RBI need now to worry about difficulty in opening a bank account – for him the ease of banking is ensured along with the teeming billions covered by the PMJDY!!
Dr Suraj Kumar is the chief mentor at Neeti Foundation. He has worked in the development sector since 1993 at progressively senior levels (nearly 15 years with the UN) in design and implementation of programmes on governance, women’s leadership and human development, policy dialogue on rights-based development with governments, and UN coordination in India and South Asia. He holds a PhD in Sociology from State University of New York at Binghamton. He is also Visiting Fellow at Heras Institute, St. Xavier’s College, Mumbai and Fellow at American Institute of Indian Studies from 1991 – 1992.