BackThe first year
The 150 million new accounts under the Jan Dhan scheme have mostly, if not entirely, gone to unbanked households
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Among the major initiatives of the new government is the bid to reduce financial risk in the lives of the poor.
In the first year of the new government at the Centre, the clearest new economic initiative has been the decisive shift towards financial inclusion as the pathway out of poverty—away from the exclusive reliance on household income supplements which had marked the approach of the previous 10 years.
The Jan Dhan scheme, targeting a savings bank account for every unbanked household, took off on 28 August 2014 in mission mode, and has been phenomenally successful in terms of sheer numbers. The 150 million new accounts have mostly gone to unbanked households, if not entirely—previously banked households may well have opened an account under the scheme for the insurance (life and accident) benefits carried. Banks have delivered commendably on a task for which they had very little lead time.
The scheme has ambitions extending beyond plugging subsidy leaks. It aims to pull a wider pool of savings into the formal banking system and, through an overdraft provision, to meet unforeseen liquidity needs at far lower rates than through the informal finance network that the poor presently access.
The poor save but on an unpredictable timeline, with upward spikes when there is a windfall income of some kind. Their borrowing needs are similarly unpredictable, driven by imperatives like medical expenditure. The informal financial world has successfully mediated between these saving and borrowing spikes, triumphing through ease of access, but at a high cost. The risk premium is built into both deposit and lending rates. These informal systems operate well below the regulatory radar, because they are not large enough to even be called non-bank financial institutions. They are just individuals acting as saving aggregators, networked with other aggregators. The incidence of scams is high.
My personal efforts over the years to get a bank account for unbanked domestic workers failed repeatedly because formal deposit rates were simply not high enough to pull them into the banking system, even when branch expansion had enabled ease of access. For a deposit of ₹ 100, even today a large sum for a poor family to save, a return of one rupee or less per month was typically rejected as an absurdly low reward for the denial of present consumption that went into that saving. They operated at a different point on the risk-return trade-off.
Against that background, the success of the Jan Dhan scheme is most impressive. As of the latest figures on its website for mid-April 2015, the average deposit in the 150 million new accounts stands at a little over ₹ 1,000, although the burden of a non-zero deposit is actually carried by only one-third of the total number of accounts (by figures as of 31 January). The Rupay debit card that comes with the account has to be operated at least once every 45 days in order to keep its validity which, in turn, is necessary for the insurance benefits going with the scheme. In this way, account holders are incentivized to engage continually with the bank.
Continual operation of the debit card will be something of a challenge in rural areas where the banking correspondent (BC) network has not become quite the effective last-mile link hoped for. An annual survey of BCs by the Reserve Bank of India (RBI) shows a high attrition rate, arising from low volume of business to which their compensation structure is necessarily tied. The BC was part of an earlier financial inclusion thrust driven by RBI which, in its first phase over 2010-13, covered nearly 75,000 previously unbanked villages with a population over 2,000, with either BCs or brick and mortar branches. Fortunately, the imminent licensing of India Post as a payment bank will add to the last-mile reach of the banking network.
Urban India should pose much less of a zero deposit problem. The avidity with which the urban unbanked responded to Jan Dhan was not even the prospect of insurance or overdrafts so much as subsidised access to cylinders of liquefied petroleum gas (LPG) for cooking fuel, which became possible for the first time with evidence of a bank account into which the subsidy could directly be transferred. The scheme named PAHAL started 1 January 2015. PAHAL carries expenditure saving extending far beyond the subsidy itself, since there is an initial price advantage just from switching to a regulated gas supplier. Previously, access to LPG cylinders had to be hedged by severe user and residence identification, so as to protect against commercial profit making when the subsidy went to the oil company directly. That did not prevent the cylinders from circulating in the unregulated market anyway, at exorbitant prices. All but the very poor in urban India bought cooking gas at those prices because of the impossibility of buying or gathering enough firewood.
PAHAL is working. There are many triumphant recipients, reported to have reached 128.7 million (some of whom may be seriously non-poor), with every receipt spreading word that this is a promise that has been kept. And 40 million ghost customers have been weeded out. As time goes on, timely supply of gas cylinders will be threatened by obstruction from those previously making money off diverting those ghost sales into the unregulated market. So the protection of Jan Dhan as a promise goes beyond mere functioning of the scheme at the bank end. There has to be strict oversight on whether the ancillary benefits of the new account are being duly delivered as promised. And that is the key to whether Jan Dhan as an anti-poverty scheme succeeds or fails. If lower risk is what formal finance offers against informal finance, that prospectus has to be scrupulously respected.
The official world in India is very good at doing things in mission mode. We run the Kumbh Mela every 12 years with a flow of millions of pilgrims, doing sanitation and solid waste for that massive gathering without disease and disaster. But we are unable to do everyday sanitation and solid waste removal where people live. Routine everyday systems call for regulatory protocols and reporting formats and templates. As a people, we seem to have a cultural aversion to this kind of procedural regimentation. Paradoxically, the person best known in the world for tirelessly preaching the benefits of checklists is an American doctor of Indian origin, Atul Gawande.
Two additional insurance schemes have now been made available to all those with a bank account, for both accident and term life insurance, with a provision for auto deduction of the premia from the account to which the scheme is linked. The scheme for accident insurance carries a very modest premium of ₹ 12 per year, and covers both accidental disability and accidental death.
Together, these initiatives demonstrate a coherent and most commendable thrust towards reducing financial risk in the lives of the poor. The other major disability from which the poor suffer, the high price of credit, has been addressed (for consumption loans) through the overdraft facility attached to the Jan Dhan account. The overdraft facility will accrue only after ‘satisfactory’ operation of the account for six months. The manner in which that clause is interpreted holds the key to reducing the number of zero accounts, and to ensuring that another default window does not open up for banks already under stress from loans gone sour.
For larger production loans, the Micro Units Development and Refinance Agency (MUDRA) has been launched, presently as a division of the Small Industries Development Bank (Sidbi). Whether MUDRA succeeds where Nabard and other such refinance channels have failed depends on how it is structured. Production loans for the poor typically ask for ₹ 25,000 or less, based on a business model which is no more than a hunch. Protection against default can only be secured through formation of groups who will mutually underwrite each other. MUDRA refinance has to be so structured that it will not reduce due diligence at the primary lending end.
It may be a good idea to involve gram panchayats, for registration of borrowing groups if nothing else. Cynics may argue that involving panchayats will be the surest way to disastrous capture by local elites. Perhaps. The key is to have group formation at town hall meetings of the gram sabha, rather than to delegate it to the panchayat council.
If there is a downside to the financial inclusion initiative, it is that the burden of carrying financial inclusion to the poor falls on banks at a time when they are already under very severe stress. The hope, however, is that with a larger universe of bank connections to the poor, priority sector lending can be better directed towards meaningful production loans, rather than disbursed regardless of the quality of the loan application just to meet a disbursement target. With more effort towards formation of mutual guarantee groups, the default rates on priority sector lending should hopefully come down.
Indira Rajaraman is an economist and is currently on the board of directors of the Reserve Bank of India.
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