@ Critically Examining the Effect of PMJDY on Financial Inclusion in India
Analyzing the ambitious JAN DHAN YOJANA by GoI
Studies have established a strong link between financial exclusion vs. poverty and the idea that developing a strong financial system leads to rapid economic growth. Due to this, financial Inclusion has been the core objective of developing countries. The focus has been to promote financial Inclusion as a policy goal, especially for those ignored by formal sector institutions. According to World Bank, Financial Inclusion is the absence of price or non-price barriers in using financial and banking services & economy depends on three pillars:
1. Financial Inclusion
2. Financial Literacy
3. Consumer Protection
These pillars foster people’s empowerment via accessing various facilities of the financial system more efficiently and contribute to the expected growth of society and a country’s economy. The success parameters of the financial inclusion policy are: Opening at least one Bank Account per household, ensuring a regular deposit for savings and withdrawals for usage under that bank account, and the bank account being used for payments.
The major challenges countries face bridging this gap between the sections of society and ensuring that all segments come under the ambit of the formal financial system.
Need and significance for Financial Inclusion in India
The goal of financial Inclusion in India started with the following objectives:
Economic Growth: To ensure equitable growth in all the sections and reduce disparities among segments regarding income and savings.
Saving Mobilization: Saving mobilization via access to financial services, forming capital, and strengthening the country’s economy.
Bringing in new players in the financial system: Opening and diversifying the financial field to facilitate the entry of new players, leading to the growth of banking sectors
Social benefits: Providing employment, a regular income stream, and alleviating poverty by including the untapped into the formal financial segment
Good governance objective: Including maximum population under the formal financial system.
PMJDY (Pradhan Mantri Jan Dhan Yojana)
PMJDY was launched in 2014 to ensure easy access to financial products and services at an affordable rate and backed by technological innovation. This was to cut the customer acquisition and maintenance costs for the lenders.
The basic provisions of the scheme were as follows:
Banking the unbanked: This included the opening of a basic savings bank deposit account with minimal paperwork, e-KYC, account opening in camp, zero balance & charges.
Securing the unsecured: Provision for issuing debit cards for cash withdrawals & payments at merchant locations, with free accident insurance coverage of Rs. 2 lakh
Funding the unfunded: Access financial products like micro-insurance, overdraft for consumption, micro- pension & micro-credit to all.
The first phase of the scheme was based on six pillars:
- Universal access to banking facilities:- Division and mapping of the district into areas with smaller households for easy access to banking services (1000–1500 households/distance of 5 Km)
- Basic Banking Accounts with overdraft facility & RuPay debit cards:- Aim to cover all households and provide an overdraft facility of Rs 5000 through debit card.
- Financial Literacy Program: To create awareness among the users about making the best of their services.
- Creation of Credit Guarantee Fund: Mandate for creating a Credit Guarantee Fund to help cover the defaults in the overdraft accounts.
- Micro Insurance: Provide micro-insurance to all willing and eligible persons. Accident covers up to Rs. 1,00,000 and life cover of Rs. Thirty thousand on the account opened between certain dates.
- Pension schemes: Providing pensions to the people in the unorganized sector via the Swayalamban scheme.
Identifying the target Segment of PMJDY
The target segment of PMJDY is Landless Wage Labourer, Small/Marginal Farmers & Medium Farmer/Small Business. The issues of the target group of PMJDY were a lack of coherence in the central structure itself, which was true for all the previous initiatives taken by GoI and RBI for Financial Inclusion.
Designing of the PMJDY scheme
PMJDY was designed to keep the bank account at heart, where accessibility and availability of other financial services, products, and other benefits are built.
1. Overdraft credit facility up to 10k by banks
2. Distribution and access to social benefits like Atal pension yojana, NPS
3. Linking for payments of allied payments like LPG subsidies, scholarships, and MNREGA payments.
4. Providing free RuPay card and providing financial literacy to increase card-based transaction
5. Access to social security financial products like insurance
6. Easy linking/De-linking with UPIs, additional banks for easy accounting
PMJDY introduced JAM Trinity, which stands for Jan Dhan accounts, mobile numbers, and Aadhaar cards. The scheme’s objective was to plug the leakages of government subsidies by directly transferring the benefits and subsidies into the beneficiary’s account. This was important as Government spends around 4.2% of GDP on subsidies, especially via PDS.
Subsidy leakage and black marketing were chronic issues in the system in India. The presence of intermediaries at all the stages meant that leakage could not be traced with precision. Hence, the intended beneficiary was left out. With JAM, Aadhar provided the biometric identification of the exact user, while the mobile number and Jan Dhan account facilitated the direct transfer of money, eliminating intermediaries.
Analysis of after-effects of PMJDY
In 3 phases and seven years of operation, the number of beneficiaries has grown to 43.04 crores, with women leading with 23.87 crores. Also, it empowered the woman of the house to be self-reliant in case of any financial need.
The number of deposits in these accounts stands at INR 146230 cr, with INR 3400 per account. Though the amount seems less, the growth rate has improved since 2017 due to the rapid rise in internet penetration and surge in financial literacy.
Since the idea of providing overdraft facilities was on the family level, coverage of households became important. The average household coverage stands at a staggering 99.97%, with 27 out of 36 UTs and States scoring 100% coverage and the lowest being 99.71%. As per the data for 2021, around 13.2% of total accounts (5.51 crore out of 43.04 crores) PMJDY were zero balance accounts, down from 50% in 2015, while the number of dormant accounts stands at 17.9 percent (7.70 crores out of 43.04 crores), down from 45% in 2015.
Apart from this, PMJDY has promoted financial literacy in society via Banks and SLSC participation on Media TV and by providing interactive videos and materials via skilling centers in regional languages. They launched an animated comic book for engaging the customers while imparting financial literacy. The number of overdraft facilities available stands around 10 million, up from 6 million in 2015.
Challenges faced and the road ahead.
Even though numbers show that PMJDY and JAM have a big impact on the state of financial Inclusion in the country, there are a plethora of problems that exist even today, which are:
a. Insufficient Banking Infrastructure: The states decided to work on the offline presence of banks to increase outreach and promote digital payments owing to better governance and lower cost. However, the numbers are still falling, with only 90% of India’s 1.25 lakhs BCs active. The transactions through BCs are still on the higher side than personal transactions in those areas (a total of 14% of total transactions through BCs). Also, only 7% of the total BCs are women.
b. Low Financial literacy: India is ranked 121/144 on financial literacy, with only 27% crossing the cutoff, less than major developing countries. While PMJDY has taken the initiative to impart financial education at the local level, it has not been enough without a central umbrella policy.
c. Dormant accounts: Out of 43.04 crore accounts, more than five crores are closed, while 18% of the total accounts are dormant, signifying a lack of interest in a large set of customers to use the financial services. Also, even though the provisions for additional services like checkbooks and overdraft facilities seem low, a large section found it difficult to do transactions once in 45 days or keep the account operational, leading to many dormant accounts.
d. Limited access to credit: The credit deposit ratio dropped from 68.1% in 2015 to 67.2% in 2020. The major issue is the perception that the PMJDY account is an “account for receiving government money, “ not savings and loans. Banks have been reluctant to provide overdraft facilities to people on the supply side and have often complained that people treat that as “free money” with no intention to pay it back.
e. Lack of suitable products: The lack of diversified and tailor-made products has kept the MSMEs and big farmers from using PMJDY as their needs are getting satisfied by MFIs and NBFC. Hence, they have not considered PMJDY as their primary source of credit.
f. Monitoring issues: There is no central benchmarking or key metrics on which the performance of banks, areas-wise targets, and transactions can be compared. Hence, there is inequality in pushing the scheme to the end customers. Common metrics like transaction value/account
Conclusion
PMJDY and JAM turned out to be a masterstroke in the country’s strategy for Financial Inclusion. While the previous initiatives did have some merit, they worked in silos with no clear authority and accountability, and hence the effect was scattered and eventually weathered out. PMJDY was built with Aadhar back bank account in the backdrop and bundled multiple financial services like Credit borrowing, Deposits, Insurance schemes, DBT, and digital payments, thus providing a higher value proposition to the target customers. Along with this, technology formed the backbone of the service with clear-cut responsibility delegation at the main and administration level. The effects are positive, as evident from the data of the number of beneficiaries, debit cards issued, and deposits in the account. However, there are still social and structural problems in the system, which need more Government and private player intervention. What needs to be seen is the impact of the 4th phase of PMJDY as India looks to strengthen the MSME segment.
References
1. Report of the Internal Working Group to Review Agricultural Credit, RBI. September 2013
2.https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/IWG988615AAEB4A4272954210 2111DCA5FC.PDF
3. https://doi.org/10.29121/granthaalayah.v5.i4.2017.1806
4. https://www.microsave.net/wp-content/uploads/2020/05/PMJDY-1.pdf
5. http://www.researchinventy.com/papers/v2i6/D033015020.pdf
6. https://annals-csis.org/Volume_14/drp/pdf/32.pdf
8. The Global Findex Database 2017, Measuring Financial Inclusion and the Fintech Revolution
9. https://globalfindex.worldbank.org/sites/globalfindex/files/2018- 04/2017%20Findex%20full%20report_0.pdf
