The Pradhan Mantri Jan-Dhan Yojna (PMJDY) to provide universal access to banking and financial inclusion has now been formally launched. The scheme envisages provision of a bank account, a debit card, and accidental and life insurance cover up to Rs1.30 lakh for poor families. Further, the vision is to gradually move in a direction where the poor are able to operate their bank accounts from their mobile phones as mobile penetration is higher than financial services penetration.

The new scheme is unique in two senses. First is that while earlier, expansion in banking was considered as an opportunity for cross-selling insurance, this time providing insurance upfront to everyone will be a novel departure. Not many people know that the Indian government, under its Postal Life Insurance (PLI), provides one of the cheapest insurance. PLI can be one of the vehicles for this insurance cover. However, PLI needs to be completely revamped to meet the ambitions of this new scheme. Currently the scheme is open to government employees and rural population.

However, more crucially, one of the features of the PMJDY that makes it different is the provision of a debit card. The experiences of advance countries suggests that as the economies grow, preference for substituting cash with more electronic based payment methods becomes imperative. The experience in India over the last couple of years has been somewhat on similar lines. Even with an associated fee, the electronic mode can be less expensive compared with the available alternatives. The use of electronic payment instruments also allows the unbanked to start building a transaction history, which can be a step towards initiating them towards financial inclusion. Additionally, data suggests that debit cards are a preferred option of use in India than credit cards. The experience in China and Germany, both of whose economies are bank-dominated, suggest the same. This preference, if accounted for in policy, can lead to significantly better product design and hence, customer satisfaction for banks.

Choosing a cost-effective model for such financial inclusion will require banks to significantly free up human resources, apart from using a banking correspondent model. It may be noted that in the next five years nearly one-third of the existing manpower of banks is going to retire on attaining superannuation. Against this background, banks can continue to encourage people to (a) go for branchless banking (mobile and Internet banking) and (b) digital banking. In effect, through digital banking, customers will be able to open accounts on their own and have a debit card issued instantaneously. In terms of economics, digital banking will help banks bring down intermediation cost. Banks in India operate with higher net interest margin (NIM) of 3%-4%. Foreign banks, particularly European ones, operate with 1%-2% NIM.

Digital banking will also help in redistribution of manpower requirements to a significant extent and will also impact positively on profitability of banks. A digital banking model could be very effective and cost savvy for payment banks and small banks, as these banks will be allowed limited banking access and are likely to be opened under differentiated banking license, once the Reserve Bank of India comes out with final guidelines. Note, the purpose of these banks is to hasten the process of financial inclusion.

With increase in financial inclusion and digitalization of banking, requirement of cash in the economy will reduce, thereby helping in controlling unaccounted money in the economy. In fact, we expect the cash component in broad money supply to decline in line with developed countries like the UK (2%), Australia (3%) and Japan (6.0%). The positive spill-over from this structural transformation in the long-run will be enormous.

Soumya Kanti Ghosh is chief economic advisor, State Bank of India.

Co-authored with Arun Chansarkar.

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