Four financial inclusion schemes and one Aadhaar card
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Suddenly everybody’s heard of the Pradhan Mantri schemes. The driver knows about it, so does the housekeeper, the sweeper, the plumber, the “pressguy” and the fruitwala. Some bank branches are buzzing—long queues and lots of excited chatter. What’s up? We could call it the Modi push. On 9 May, he launched three financial inclusion schemes that offer life cover, accident insurance and pension. These ride on the first Modi push—the Jan Dhan Yojana, under which 125 million bank accounts were opened by 31 January 2015. This, in turn, rides on the Aadhaar unique identity card. With more than 810 million unique identity numbers covering 67% of residents in India already issued, the base for a large-scale financial inclusion programme has been built.
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) is a group life insurance pure term scheme that costs Rs.330 a year for a life cover of Rs.2 lakh. People between ages of 18 and 50 can enter. The cover continues till age 55. There is a case to extend the cover till age 60 or 65 at least, and not terminate at age 55, given that the average Indian age is now 68. Life Insurance Corp. of India, or any other willing insurance company, can offer the scheme through a bank. I checked around and found that HDFC Standard Life Insurance Co. Ltd has already sold almost 50,000 policies through HDFC Bank Ltd and other banks. ICICI Prudential Life Insurance Co. Ltd is offering the product through ICICI Bank Ltd. The process is simple and tech-enabled and should get traction, says an ICICI Prudential insider. SBI Life Insurance Co. Ltd is offering it through State Bank of India (SBI) and Vijaya Bank. According to SBI officials, till 9 May, SBI had already sold 2 million policies. Kotak Mahindra Old Mutual Life Insurance Ltd is going to begin soon and will vend it through Kotak Mahindra Bank Ltd. The bank will be the master policy holder.
The second scheme, Pradhan Mantri Suraksha Bima Yojana (PMSBY), is an accident insurance scheme that gives Rs.2 lakh if the policy holder dies in an accident or is disabled due to an accident. At Rs.12 per year, the product is really cheap.
The third scheme is the Atal Pension Yojana (APY), which will give a defined benefit contribution of a maximum of Rs.5,000 for defined contributions. This is a watered down version of the National Pension System-Swavalamban (NPS-S), whose subscribers will automatically be migrated to APY. But an opt-out is there for those who want to continue with NPS-S.
The design, execution and delivery of the schemes point to a new pragmatism in the government. Simply announcing schemes in a budget speech and then waiting for the leaky, sleepy system to deliver does not work. The life product is right—a pure term plan—the best value-for-money insurance that anybody can buy. It is what is called an OTC (over-the-counter) product—it does not take five pages of legalese to explain the benefit; anybody can understand and buy. The accident cover is simple, cheap and easy to understand. The pension product is more nuanced and the jury is still out to see if it works at the ground level. It is not enough to get the right product; it also has to be made available at a mass level. That has been done by linking the security schemes to the bank account, which is linked to the Aadhaar number. Connect the dots and you have a robust, executable system of financial inclusion. If the first step was to open bank accounts through the Jan Dhan Yojana, this is the next step, to make the bank accounts active by making banks vend a product that will get people to queue up. Auto debit of premiums will ensure that the policies are kept alive and that people are forced to start using their bank accounts.
To get results, targets have been fixed. Banking insiders tell me that a target of 1,000 policies per banking staff has been fixed for both the schemes. Banks will get a transaction fee of Rs.11 (3% commission), and agents and business correspondents get Rs.30 (9% commission) for the life cover. For the accident cover, banks, agents and business correspondents get Rs.1 (8% commission). The responsibility of claim management will rest on the banks or the other vendors. That part will unfold as claims begin to come, and banks will have to strengthen their third-party product teams.
The overall comment from inside the financial sector that I could tap into is this: these are great schemes and will do much for building social security in India. A government with a budget deficit has got the corporate sector to initially pick up the tab—social security through the corporations. Whether corporate profit will get hit will be known once the claims experience builds over the next three years—the premiums are frozen for three years—after which either a re-pricing or a government dole could happen. But an insurance expert I spoke to said that given the scale of this plan, the schemes will be profitable.
It may be a good idea to get your domestic staff, service providers and vendors to open these accounts. And as you do that, examine your own portfolio of financial products and compare costs. If you’re paying a whole lot more, maybe it is time to redo your own financial life with sensible products rather than the junk you are sold.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at email@example.com