Are Jan Dhan bank accounts actively used?

Many analysts attribute the recent electoral success of the Bharatiya Janata Party to the effective implementation of social sector schemes launched by the government of India. The Pradhan Mantri Jan Dhan Yojana (PMJDY) is one such scheme, extremely ambitious in scope. It gave every person in India a bank account, including hundreds of millions of poor, financially excluded individuals. Are these accounts used and if so, how active is the usage? In a recent paper, we analyse these questions.

We find that activity is slow to start but picks up and shows convergence to the level of normal savings bank accounts opened in this period. The formerly unbanked may never have stepped into a bank branch before the PMJDY, but once they do so, they exhibit a surprising demand for banking services.

Not many were convinced about PMJDY when the programme was announced on 15 August 2014. The scepticism was perhaps not unwarranted. In India, financial exclusion has been widespread. The World Bank’s Findex shows India as a laggard in financial inclusion, with 65% of the population lacking access at the end of year 2011. In contrast, in China, only 35% of the population was excluded from the formal banking system as of 2011.

To be fair, there has been no lack of effort to tackle financial exclusion in India. Policymakers have experimented with many measures to advance inclusion. These include the wholesale nationalization of banks in 1969 and 1980 and the creation of a vast branch network with over 100,000 branches and 1.1 million employees. Persistent gaps remained. There were banks, branches, ATM networks, PoS (points-of-sale) terminals for swiping cards, and mobile apps, but not bank accounts. The PMJDY’s answer was simple: Just give the excluded new accounts. If we do so, will the excluded adapt and use the new accounts? Or are accounts simply irrelevant, Mary Antoinette’s cake to those needing bread?

The data listed in the PMJDY website clearly shows a steady increase in the number of accounts and savings accumulation in PMJDY accounts. Seventy-six per cent of accounts have had at least one transaction. However, from these indicators, one cannot tell whether the usage is one-off or account holders use the accounts actively and whether a small number of active accounts drive the aggregate numbers. PMJDY accounts are also targets for government benefit programmes such as LPG transfers. Do these drive transactional activity or do we see active transactions initiated by the newly included? What sort of transactions do we see? Our study sets out to answer these questions.

In a recent working paper titled Bank Accounts For The Unbanked: Evidence From A Big Bang Experiment (goo.gl/qrSJby), we examine transaction-level data to answer questions about account usage. We look at two years of data for a set of about 3,000 accounts opened in the first wave of PMJDY around August 2014. Our data ends just before the demonetization in November 2016. We look at transaction descriptions to distinguish between active transactions such as cash deposits, ATM withdrawals versus passive transactions such as interest debits or LPG transfers. Our focus is on active transactions as these require the involvement of the account holder and hence represent usage. We do not know account-holder characteristics but by using “fixed effects”, we ensure that the results are not driven by unknown, unobserved attributes of account holders.

We find that the number of active transactions per account transacted by PMJDY account holders starts off slow but increases with the age of the account. It increases from 0.61 active transactions per account per quarter during the first three months of an account’s life to 1.12 transactions per account per quarter during the seventh quarter, which represents a 100% growth in activity. Active transactions initiated by account holders represent nearly 45% of all transactions. Bread-and-butter uses such as ATM withdrawals drive transaction growth. We also examined accounts that do not receive LPG and other subsidies. The pattern of increased usage with time holds here as well.

Although the accounts are used for transaction purposes, account balance grows steadily with time. This shows that PMJDY accounts are also used for accumulating savings. Moreover, the account holders appear to be developing trust in the banking system as a destination for storing their cash. Finally, in line with the national numbers, we find a steady decline in the number of zero-balance accounts. Less than 29% of the accounts have zero balance in our sample, near the national average of about a quarter of accounts reported in December 2016.

While many economists study credit constraints, or the lack of credit for poor people, our study suggests that many poor also face savings constraints. Thus, in addition to the many day-to-day and existential challenges faced by the poor, the ones that manage to save could not do so using the formal financial system. While many reasons can be cited, ranging from high transaction costs to social customs, our study throws in one more into the mix: lack of access. Simply opening the gates of the formal sector seems to bring in the excluded.

Perhaps the key takeaway from the PMJDY programme is that access begets inclusion. A memorable moment in the 1989 Kevin Costner movie Field Of Dreams is when the protagonist hears a whisper, “If you build it, he will come.” If we simply give bank accounts to poor people, they will use them.

N.R.Prabhala is a professor of finance at the University of Maryland; Yakshap Chopra and Prasanna Tantri are with the Indian School of Business.