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PM Jan Dhan Yojana (PMJDY) has made sure that the universal access to a bank account a near reality. However, the level of utilisation of such accounts is very low, which calls for promoting financial literacy in the country as well as radically reforming the financial inclusion agenda.
What is financial inclusion?
- It is the process of making financial services (savings, payments, credits, and insurance) accessible and affordable to all persons and businesses.
- It aims at addressing and bringing solutions to the issues that exclude people from participating in the financial sector.
- The United Nations defines the goals of financial inclusion as follows
- Access at a reasonable cost for all households to the entire range of financial services.
- Efficient and safe institutions governed by proper regulation and performance standards.
- Financial and institutional sustainability to guarantee continuity and certainty of investment.
- Competition to ensure choice and affordability for clients.
What is the need for financial inclusion in India?
Growth – It encourages the habit to save, thus enhancing capital formation in the country and giving it an economic boost. Also, the availability of sufficient and transparent credit from formal banking institutions will promote the entrepreneurial spirit among the people = increase in productivity and prosperity in rural areas.
Service delivery – Direct cash transfers to beneficiary bank accounts rather than physical cash payments against subsidies will become possible = funds actually reach the targeted beneficiaries instead of being siphoned off along the way.
Banks’ efficiency – Banks which are operating in a financial inclusion sector could experience higher operating efficiency in financial intermediation.
- It is because retail deposits are cheap and insensitive to risks when compared to wholesale funding = add considerable stability to the sector.
- Moreover, increasing banking outreach in newer areas helps reduce distance for consumers = good customer relationship & know them better = judicious pricing & lending decisions.
Financial exclusion leads to negative consequences like
- Difficult to get jobs because employers want to pay wages into account.
- Not having bank account reduces credit score = difficult to get access to other financial products such as insurance and credit.
- Depending on informal or illegal lenders = Huge debt = Suicides, particularly farmers.
- Savings kept in cash at home are vulnerable to theft.
- Financial exclusion of MSMEs = Social injustice because 2/3 of these units are owned by disadvantaged section.
What are the challenges to financial inclusion in India?
- Illiteracy – In India, where nearly 1/4th of the population is illiterate and below the poverty line, ensuring financial inclusion is a challenge = ensuring deposits in Jan Dhan accounts is a challenge.
- Low income and the inability to provide collateral security.
- Lack of enough bank branches in rural areas continues to be the roadblock to financial inclusion.
- More reliance on informal lending.
- Difficulty in understanding different product offerings, financial terms, and conditions.
- A lot of hidden bank charges have demotivated poor persons from availing financial services.
- Low-income groups don’t see banks as welcoming and often believe they are not for them.
- Lack of credible, low-cost and high-quality financial advice.
- Gender inequality = Most women are being excluded from the formal financial system.
- Disabled people find it difficult to access banks.
- The rising level of Non-Performing Assets (NPAs) of banks due to the large corporates makes it difficult to improve financial inclusion situation in India.
What are the initiatives taken by the government to improve financial inclusion?
- Regional Rural Banks (RRBs): On the basis of Narasimham Working Group 1975, RRBs were established to serve banking needs of rural population.
- Priority Sector Lending: is an important role given by the RBI to the banks for providing a portion of the bank loans to few specific sectors such as agriculture or small scale industries.
- Business correspondents: RBI permitted banks to engage business correspondents/facilitators for providing door-step delivery of financial and banking services.
- The opening of no-frills accounts: No-frills accounts means the bank accounts which does not require a minimum balance (or low sometimes) = Accessibility to vast sections of the population.
- KYC relaxation: Know Your Customer (KYC) requirements for opening bank accounts were relaxed for small accounts in August 2005. The opening of bank accounts became even easier with Aadhaar introduction.
- To expand the network of ATMs, the RBI has permitted non-bank entities to start White Label ATMs.
- Jan Dhan, Aadhaar and Mobile (JAM) –
- It is a three-part strategy based on using digital technologies
- Jan Dhan (banking), Aadhaar (Biometric Identity) and Mobile (transactions).
- Establishment of payment banks and small finance banks.
- Establishment of MUDRA bank to refinance micro-finance institutions to lend to non-formal sectors such as MSMEs through PM Mudra Yojana.
- RuPay Cards have considerably enhanced its market share.
- Financial literacy centres were launched by commercial banks at the request of the RBI.
- Financial inclusion of women through Aadhaar implementation.
- Unified Payments Interface (UPI) platform built by the National Payments Corporation of India (NPCI).
- National Centre for Financial Education was established in 2017 to implement the National Strategy for Financial Education.
- Self-Help Group (SHG) – Bank Linkage Programme (SBLP) was launched by NABARD to provide door-step banking to the poor with the help of SHGs.
Social security Initiatives
- PM Suraksha Bima Yojana (PMSBY) – Accidental death cum disability insurance, renewable 1 year, for 18-70 age group.
- Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) – Life insurance, renewable 1 year, for 18-50 age group.
- Atal Pension Yojana – Focus on unorganised sector.
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What are the concerns about the initiatives?
- PMJDY has ensured universal access to bank account and India now has 180 billion accounts. However, 48% of those accounts haven’t seen any transaction in the last one year.
- Only 33 percent of all beneficiaries were ready to use their Rupay cards.
- Being a cash-intensive economy, India still remains among countries with the lowest access to digital payments.
- Financial illiteracy, safety, and security concerns prevent people from moving towards the digital mode of payments. It has to be noted that, around 76% of the adult population in India does not understand even the basic financial concepts.
- People buy insurance policies without proper planning and give up halfway since they don’t have any money to pay the premium.
- Customers end up losing heavily as penalties are very harsh.
- Misuse of SHGs: Panchayats are now competing with NGOs and rural banks in forming SHGs due to the qualification for government subsidy = Political pressure and misuse of funds.
What should be done?
- Merely opening an account does not make sure that the account is used. Instead, the following things can be done for the proper utilization of accounts.
- Financial literacy programmes should be undertaken and backed by products that address the real needs of consumers, with the support to use the product.
- People have to be imparted an ability to understand and execute matters of personal finance such as basic numeracy and literacy, financial awareness, knowledge and skills, attitude and behaviours needed to make sound financial decisions, budgeting, investing and risk diversification.
- Employing a service provider for financial literacy programmes can make people better understand the products and use them regularly.
- A cascading training model can be adopted in rural areas in which core trainers train peer educators, who in turn train community members.
- As India uses Aadhaar for financial inclusion, the government must come up with a robust data protection regime address the privacy concerns.
- NABARD has an extensive presence across the country and hence it should be made nodal and accountable agency for financial inclusion.
- Digitization of land records backed by Aadhaar linked mechanism = Institutional loans to farmers.
- Short-term loan waivers or interest subvention should be replaced with a crop insurance scheme for small and marginal farmers.
- SHGs should be brought in to the banking mainstream. Overloading SHGs with multiple agenda especially the government programmes should be done away with.
- The recent enthusiasm shown by corporates in establishing payment banks should be properly utilized to improve financial inclusion.
- Finally and most importantly, a financial inclusion strategy that is sensitive to regional, demographic and gender-related factors, needs to be crafted carefully.
Updates – May 13, 2020