Lending, more specifically moneylending, as an economic practice has existed for centuries: first wearing the banner of barter, then under the tutelage of mercantilists and pawnbrokers, and today, in the hands of modern banks, credit card companies, mortgage lenders and the like. With such evolution, credit became a necessity but it wasn’t accessible, available or affordable to everyone. Primarily, the penurious and destitute were systematically excluded from this phenomenon.
India too wasn’t an exception to credit debarment for certain classes of society. However, the pradhan mantri jan dhan yojana (PMJDY) stepped in to change that. PMJDY, the prime minister’s people money scheme, has arguably been a game-changer, accelerating the process of financial inclusion. By February 2017, less than three years since its inception, over 270 million bank accounts were opened and almost Rs 665 billion ($10 billion) was deposited under the scheme. PMJDY isn’t the first financial inclusion programme to be implemented, but it is the first of its kind to gain substantial traction. This begs the question, what is so unique and conspicuous about PMJDY, and why was it able to grasp the considerable footing it has?
The thought behind PMJDY, i.e. ensuring access to financial services, is not in itself a new idea; financial integration has consistently been on the government’s agenda. To meet this end, Regional Rural Banks (1975), National Bank for Agriculture and Rural Development, NABARD (1982), Chit Funds (1982), and Narasimham I & II Committees (1990s) each had a laudable role to play. Inter alia, greater autonomy was given to public sector banks; Non-Performing Assets (NPAs) were targeted; foreign banks were allowed to enter the domestic market; and the Reserve Bank of India (RBI) introduced a monetary policy tool, Liquidity Adjustment Facility (LAF), to encourage banks to borrow money via repurchase agreements. The formal financial sector swelled and cheap credit avenues were instituted. This growth, however, was like building a skyscraper without an elevator, and several remained in the informal counterpart.
It was 2005 when the term financial inclusion was first used in the Indian context by then governor of the RBI, Y Venugopal Reddy, in the annual policy statement. He fervently voiced alarm on the exclusion of vast sections of society from the formal financial system. Taking this concern forward, the report of the internal group to examine issues relating to rural credit and microfinance (Khan Committee), urged banks to develop a basic, no-frills account with relaxed norms and elbow room to avail banking facilities. These efforts, albeit commendable, were implemented in phases (programmes were almost mutually exclusive of each other) and concentrated to specific pockets (only a few sections of the population benefited from the schemes).
The stage was thus set for the swabhimaan campaign launched by the UPA government in 2010-11, which specifically focused on carting banking services to rural areas (villages with a population greater than two-thousand as per 2011 Census). With newly established village-level presence, this easy-to-access customer-facing channel was to provide banking and allied facilities like micro-insurance and pensions that were otherwise remote opportunities. While banks met their targets, estimates portray that over 75 million households were still absent from formal financial services, 60 million in rural and 15 million in urban areas. Accruing to this relatively limited reach, Swabhimaan morphed into PMJDY under the Modi government in 2014.
PMJDY appears to be built on simplistic norms with blanket utilisation. Its appeal is uncomplicated access to financial services (like banking, savings & deposit accounts, remittance, credit, insurance, pension) for anyone, rural or urban, who wishes to access them. The absence of this categorisation smoothens dissemination and implementation of the programme. Some distinctive provisions include no minimum balance for bank accounts, an accidental insurance cover of Rs 1 lakh ($1,500), banking services on non-smartphones (which were previously only available on smartphones), grievance redressal mechanisms, and active state/district-level monitoring. These mechanisms make it easy for anyone to open a bank account and engage in financial services. Further, PMJDY promotes differential banking, allowing new entrants to innovate without the legacy constraints older banks might face. It was envisioned that PMJDY would account for social security errors, alleviate asymmetric information via cashless payments, and tackle black money (as evident through Modi’s debatable demonetisation of large currency notes).
PMJDY is a work in progress — neither its apparent successes nor its implicit failures are an accurate assessment of the scheme. Three years on, PMJDY has been applauded for financially empowering women and vulnerable sections of society, achieving 100 per cent household coverage in Jharkhand, and in effect, “putting the basic plumbing of financial inclusion in place”, thereby spurring water (cash) to flow. Further, it has significantly eliminated middlemen in transactions. On the flipside, privacy and security issues have cropped up, new light is shed on the scheme’s susceptibility to frauds, and present bias is increasingly being examined, i.e. whether the number of bank accounts opened are actually being used. Additionally, several features of the scheme remain ambiguous. For instance, the promising overdraft facility is left to the discretion of banks, which creates prejudices as banks will avoid such situations that could potentially lead to NPAs.
Thus, neither of these views is a conclusive judgment of the scheme. However, criticism and praise abound, without having a competitive alternative, PMJDY appears to be the most successful financial inclusion scheme so far.
(Prakhar Misra is a Chevening Scholar reading for a Masters in Public Policy at the University of Oxford)
(Kadambari Shah is a senior analyst at IDFC Institute)