India’s banking scheme draws in 200m new customers
Narendra Modi has worked hard to broaden access to bank accounts, with remarkable success. But Deepak Adhikari finds that more work remains if the Indian government, economy and rural poor are to feel the benefits
A year and half ago, India’s Prime Minister Narendra Modi announced an ambitious plan to provide banking services to the country’s vast ‘unbanked’ population. The Pradhan Mantri Jan Dhan Yojana (PMJDY) – meaning Prime Minister’s Public Wealth Plan – was Modi’s first major offering after his election victory in May 2014. The aim was to promote financial inclusion among India’s poor by offering zero-balance bank accounts with accident insurance cover of 100,000 rupees ($1500), an overdraft facility of 5000 rupees ($75), and life insurance cover of 30,000 rupees ($450).
Ultimately, the government hopes that increasing the proportion of people with bank accounts will enable it to pay subsidies for services such as for education and healthcare directly to the rural poor. The other goal is to reduce the corruption afflicting India’s subsidy systems and public services, and to improve efficiency in financial services.
Half of India’s 1.25bn people lack bank accounts, and New Delhi is eager to increase access to banking services among a rural population who currently depend on the informal money-lending system. To minimise barriers to access, under PMJDY account holders can access services using a single fingerprint in any Indian bank and through mobile telephones.
The scheme proved popular, and by February 2016 more than 211m accounts had been opened and 335bn rupees ($5bn) deposited under the program, according to the official website of PMJDY. Nudged by the state, and keen to bring a vast new client base into the fold, the banks got on board – and just four months after its launch, PMJDY was recognised by Guinness Book of World Records for the record on the most bank accounts opened in a week: 1.8m. Buoyed by the scheme’s success, in the 2015-2016 Budget Indian finance minister Arun Jaitley proposed the creation of a universal social security system targeted at the poor and underprivileged.
India’s President Pranab Mukherjee, who previously served as the country’s finance minister, has applauded the PMJDY. Addressing a joint meeting of the parliament on February 24, he said: “My government has pledged to make this goal (of ending poverty) possible through financial inclusion and social security, the two wings on which human aspirations take flight. Today, I am proud to say it is the world’s most successful financial inclusion programme.”
However, experts such as Shruti Gakhar, a researcher at Brookings India, are less optimistic. “This is a remarkable feat. However, the delivery of benefits has not kept pace with the speed at which bank accounts have been opened,” she says. “Challenges in educating people about the benefits of these accounts remain: if people are not fully aware of what banks can provide them with and how to apply for loans etcetera, then the scheme cannot achieve its objectives.”
One of the problems, experts point out, is that the PMJDY was soon followed by a raft of schemes which, although different in scale and approach, looked identical in the eyes of common people. The Pradhan Mantri Suraksha Bima Yojana (Prime Minister’s Security Insurance Plan) and Pradhan Mantri Jivan Jyoti Bima Yojana (Prime Minister Life Light Insurance Plan), both launched in May 2015, provided insurance in case of death or disability due to accident. Atal Pension Yojana, also launched in 2015 and named after former prime minister Atal Bihari Bajpayee, is designed to provide a safety net for elderly people.
Even before these schemes were launched, India had sought to provide unique digital identities to its billion-plus people. Called Aadhaar (‘foundation’ in Hindi) and headed by Nandan Nilekani, a software billionaire, this system aimed to create a national biometric database of all Indians. “It is possible that the introduction of so many schemes over the last year has resulted in some confusion amongst the masses,” says Gakhar. “However, this can be resolved by banks and other stakeholders explaining the products and services offered within each to the beneficiaries. Lack of information and consumer literacy is a major challenge when addressing financial inclusion. There are still challenges in linking the Aadhaar to PMJDY and incentivising beneficiaries to use the accounts.”
R.S. Munda, the district manager of State Bank of India’s branch in Araria district of the north Indian state of Bihar, acknowledged that the plethora of similar schemes has caused confusion. “We have counselors tasked with providing training on our financial literacy programme,” he comments. “With the help of counseling, I hope the beneficiaries will learn about the differences and select the scheme that is best for them.”
Munda noted that his bank has been short of time to deal with the scheme, commenting: “We tried our best to provide accurate information to the beneficiaries, but there might have been some gaps. When the scheme kicked off, we retained the the same number of employees: we didn’t have additional staff for this project. It was difficult for us to continue our regular work and at the same time open new accounts under the scheme.”
Sunita Devi, a 40-year-old resident of Forbesgunj, a town in Araria district, heard about the scheme through a loudspeaker mounted in a vehicle driven through her village. The mother of four had never felt it necessary to open an account; her husband Arun Thakur had one, so that seemed sufficient. “I don’t know much about the scheme, but people in my village said that I would benefit from it. So I signed up,” says Devi, who earns some extra money as a tailor.
For Gunja Devi, a 27-year-old woman, the offer arrived as she and her husband were launching their own business. “My husband recently left his job as a cook in an eatery and we opened a tea shop,” she comments. “We didn’t have a bank account. We both opened our accounts after we heard about it through television. [Indian film star] Amitabh Bachchan was urging everyone to open an account.” Both women are unsure how the account will help them improve their economic status, nor do they understand how it works – but the campaign has encouraged them to sign up.
The next step, says Gakhar, must be to help people start using their new services. In a research paper that she co-authored with her colleague Shamika Ravi, the two call for a model which specifically caters to the need of the poor. “Research has shown that unless financial instruments are designed for the specific needs of the poor, they remain under-utilized and costly for the providers – and, therefore, non-sustainable,” says the January 2015 paper, Advancing Financial Inclusion in India Beyond the Jan Dhan Yojana. “Broader financial needs of the poor have so far been met through informal means, which are costly and risky and result in sub-optimal outcomes for the most vulnerable sections of our society… Allowing and encouraging innovation in savings instruments for the poor by the formal financial sector is thus critical to achieving our goals of financial inclusion.”
The researchers also suggest providing financial services through post offices, whose roles have shrunk since the onset of mobile phones and the internet. But the main challenge facing those working to broaden access to the banking system in India, according to Gakhar, is financial literacy. “Most people remain unaware of the benefits of being integrated within the formal financial system, and information availability is key in making sure that the poor have the appropriate tools necessary to meet their needs,” she says. “The PMJDY can take this further by holding literacy camps in collaboration with local bank branches and post offices, which would educate people about the benefits of the scheme and the various products offered within it.”
The increasing uptake of mobile phones, Gakhar says, could support the agenda: “Another important challenge and opportunity is the effective integration of technology within the banking system to broaden access. People in the remotest of areas have access to mobile phones, and banks can use that to their advantage in order to broaden access.”
The mammoth task of bringing such a vast population into the banking system is in itself a major challenge; but PMJDY’s success in increasing the number of people with accounts will not help Indians’ financial circumstances unless they understand how to take advantage of their new services and opportunities. To get to this point, the government will have to overcome the bottlenecks it’s encountered, such as a lack of understanding of the banking system and a shortfall of human resources in local banks. But PMJDY has created a strong platform by widening access to banking; if the government can explain and demonstrate how people can use these millions of new accounts, it should soon see the benefits in more streamlined service delivery and stronger economic growth.
Additional reporting by Mohammed Kalam in Araria, Bihar.